5 vital points to consider when acquiring a buy to rent investment property
If you have had the faintest interest in buy to rent investment property you would have read and heard the famous quote “location location location”.
According to a New York Times article I recently read, this term was coined a hundred odd years ago and has been in use ever since.
So why is location so important?
1. Location of your buy to rent investment property for best growth
The first reason that comes to mind, is clearly to do with medium and long term capital growth. Since growth is the most vital element of buy to let property investment, one needs to give this matter considerable thought and research.
Every city has its good and bad areas, areas upwardly mobile and areas in decay. The trick is to aim at the easily recognisable upwardly mobile areas, and not be fooled by higher rental returns in decaying areas.
In my opinion, best location for residential investment growth in South Africa is the area between Johannesburg and Pretoria ( Midrand /Waterfall).
[Click here] for the inside track to owning your a unit in this location at a really good price.
2. Location for your tenants.
Try to visualise the type and nature of your tenant. Does the type and location of your property under consideration best suit yuppie bankers, single moms or retirees? Do your research and then once you have an idea of who your tenant is likely to be, try to think like them. What are they looking for? Public transport, access to office or industrial workplaces, accessibility of shopping malls, schools must be considered.
3. Location for you the landlord
I have a golden rule regarding buy to rent investment property. If you intend managing it yourself, never invest more than 45 minutes’ drive from your own house. A simple repair may require 3 or 4 visits, one to assess the damage, at least one visit to give your contractor access and another to inspect after the work is done.
The same applies to re-letting and post tenant inspections. If your investment property is too far from your house, you are asking for trouble. Of course, if you live far from the prime area you have chosen to invest in, this problem can be dealt with quite simply if by finding a good agency to manage all aspects of your buy to rent property.
Do your homework before venturing out. A half-hour meeting with a bond originator or homeloan consultant will save you hours of wasted time trying to get bonds that the banks will consider out of your reach. Banks all have slightly different affordability criteria, so do your homework.
Once you have established your affordability, you can start hunting for that investment.
5. Initial return on investment
One has to be careful with this one. I go into detail in this article on the smoke-and-mirrors tricks employed by investment clubs and developers in simply quoting return on investment based on false information.
Most economists and property experts will quote an initial return on investment when they actually mean the first years’ return on purchase price. I explained the property investor’s definition of return on investment (ROI) fully in a previous article published on the Organic Growth website, so I won’t go into detail here.
Return on investment is relevant to us investors since, like all good property investors, you would never pay for your property yourself would you? That’s what banks and tenants are for!
Your “investment” will be what it actually cost you, namely, the deposit plus any shortfall in bond repayments in the first year or two.
A simple return on purchase price calculation will however give you a quick indication of feasibility to enable comparison of different properties.
For example, a townhouse costing R 600 000 with a rental of R5 500 per month and R1000 in monthly levies would provide the following return on purchase price:
R 5500 - R1000 = R 4500 nett per month, or R 54 000 per annum
Return on purchase price in year 1 is therefore
R54 000/R600 000 = 0.09 or 9% pa
This percentage calculation can be useful for doing quick comparisons, but it is very limited in that the levies are charged in such a complex way and leases are not all equal - ie in some leases the tenants will pay for certain utilities, while in others not.
A full cashflow calculation is essential before committing to a property, click in the green tab below for your copy of our unique Investment calculator and a list of questions to ask, should you be tempted to purchase a property from a directly from developer.
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I trust this has been food for thought and worth considering before your next foray into buy to rent investment property, and your comments, questions and suggestions below would be most welcome.
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