5 Reasons to invest in buy to let property
Have you ever thought of the reasons to invest in a buy to let property?
Is it worthwhile, risky, too much hassle?
Amidst the confusing smorgasbord of options when it comes to investing, How can one choose?
I am going to share my top 5 reasons to invest in residential buy to let property, and there are many more!
I have been astounded at the returns I have personally achieved over the last 20 years!
Here are my 5 top reasons to do so yourself.
1. Low Barrier to Entry
No other investment class can compete with investing in residential property, particularly if one invests in townhouses in very good areas
Investment in residential buy to let properties requires that you only have to come up with a minimal deposit or zero deposit. This video will show you how to obtain a 100% bond on residential property.
The transfer costs for a small townhouse normally amounts to around 4 or 5 percent of the purchase price. If you are a fist time home buyer, then you can qualify for a bond of 105% of the purchase price - ie: you borrow the transfer costs too and almost no cash is required.
Try borrowing R700 000 to invest in R700 000 worth of shares!
2. Retire early [without a Retirement Annuity]
The average Johannesburg household spends a quarter of their gross monthly income on rent or their bond repayment. It stands to reason that buying four or five townhouses in Fourways, plus some patience while your tenants to pay off your property portfolio, will able to earn the average Fourways townhouse dweller’s income.
“"Financial Freedom is the point at which your job becomes optional.”
In Fourways, rentals generally rise by 4 to 6 % each year.
If you are disciplined and pay the excess rentals into your bond every year, it is not unreasonable to expect your bond to be paid off in 10 to 12 years: - Roll on financial freedom!
If your current retirement plan involves saving, or the supreme effort of investing sufficient capital in a retirement annuity, then please watch this video below where I compare a retirement annuity (RA) to buy to let property investment.
We are not registered financial advisers and hence not able to offer financial advice or quote on any RA, so I used the RA figures as quoted by a large South African Insurance company's website and compared them with the figures we do know - a simple townhouse investment!
We kicked the hornets nest!
Watch and decide for yourself.
Help me to get started in property investment
3. Educate your children
I bought a tiny townhouse in Sandton for each of my daughters when they were finishing junior school. By the time they finished high school, their townhouses had appreciated in value sufficiently for me to take out a second bond of R 300 000 on each property.
This easily provided them with an all-expenses-paid university scholarship, without costing daddy a cent. Click here to read the full story.
When my “Laat lammetjie” son arrived 10 years ago, I thought it a good idea to buy the lad a bachelor unit in Bryanston. He is in grade 4 now and already his townhouse is paying most of his school fees. His rental income is increasing annually and his townhouse will probably be paid off by the time he hits high school. A while ago he asked me if his tenant had paid his rent yet. - Cute, but he is learning!
I fully expect the cashflow from this one small townhouse to pay for his entire high school and university career.
Check out the story in this video below. (And while you are about it subscribe to our Youtube channel to stay up-dated when we load more useful property information and stories.)
4. Your tenant pays for your investment!
Simply put the buy to let property formula works like this:
- You purchase a buy to let property with 5 – 10 percent of the purchase price in cash
- You take out property finance for the remainder of the purchase price
- Your tenants pay rental which covers your monthly bond and levy costs. You’ll probably have to subsidise the rental payment for a few years until the rental income increases sufficiently to cover all your costs. Once it goes cashflow positive, your income climbs exponentially.
- Check out the cashflow numbers before you buy a buy to let rental property.
5. Inflation works for you
We live in Africa, inflation is here to stay. It’s about as certain as death and taxes.
As inflation prices rise, so do salaries, rentals and property values.(but your bond debt freezes at the original rand amount) So, how does this affect your property investment? Apart from the obvious increase in property values and rentals, another dynamic is at play here.
An example is best used to demonstrate this dynamic. When I bought my first buy to let townhouse in 2001, it cost R140 000. I took out a 100% bond, so back in 2001 I owed R140 000, and my property was worth R140 000. My loan to value was 1 to 1 (or 100%).
Say, I took out an access bond at the time and I still use the facility, and 20 years later I still owe R140 000. But the property is now worth R700 000, so my loan to value ratio is 140 000 : 700 000 or 20%.
Can you see why I don’t really bother paying off my own bonds? Inflation paid off 80% of my property in 20 years!
If I had pumped all the increased rental income into the bond over the years, it would have been paid off 7 years ago.
Property investors are of the rare breed who can say “inflation works for me!.”
Are these enough reasons to invest in buy to let property?
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