Buy-to-let – balancing the risks and rewards
Category Market News
In the years before the 2008 global financial crisis, buy-to-let became a popular way of investing in property. Back then, it involved buying a rental property with a small investment and a large home loan, then securing a renter, whose rent would pay off your loan while generating a small profit.
In the years since – and especially recently – things have changed dramatically. After 2008 banks and lenders became far stricter when granting bonds. South Africa’s current economic climate seems unlikely to alleviate the situation for borrowers.
This means it is more important than ever to balance the risk of buy-to-let with the potential rewards.
The risks of buy-to-let
The major risk of buy-to-let is cost. Transfer fees, maintenance costs, and bond repayments can become a significant burden if you’re not adequately prepared. The economic climate in South Africa makes interest rate hikes highly likely in the near future, making this yet one more factor to take into consideration.
Renters can pose another problem. In light of the local economic realities, it becomes more likely that renters will default. This isn’t easy to overcome, either, as the cost of removing renters legally can run into the tens of thousands of Rands.
Finally, there is the issue of concentrated risk. Unlike investing in stocks or listed property, a buy-to-let property places the entirety of your risk in one place. This means that if something goes wrong you stand to lose far more money.
The rewards of buy-to-let
As a long-term investment, buy-to-let is highly sound for those able to see it through. By using the rental income to pay off your bond over time, you are eventually left with a good capital gain. At this point, the percentage of rent that you can claim as profit will also naturally soar.
Another advantage is the large amount of renters in the market. While this may seem counterintuitive when you consider the risk that renters can pose, the amount of renters in the market currently means that rental prices will rise with demand, ultimately increasing income and paying off your bond more quickly.
Buy-to-let: what you need to know
Once you’ve made the decision to go ahead and buy-to-let, there are some things you’ll need to keep in mind.
The first is location: it’s important to buy property in an area that is likely to attract renters. Your property should be viewed long-term, so when picking a location you should keep in mind its ability to attract tenants in the years to come.
You’ll also need to check your bond rate, as this can be higher for buy-to-let properties.
Tied to this, thoroughly explore the necessary costs you’ll be incurring. Do you plan to use a rental agent? This will need to be figured into your final costing.
Making the commitment to buy-to-let is not to be scoffed at – it’s well worth taking your time and ensuring that you balance the scales evenly before you take the plunge.
article courtesy Betterlife Group
Author: Betterlife Group
