A first-time home owner can look at two options when purchasing a property:
- Purchasing something to live in
- Purchasing an investment property
The simple steps to buying a home:
- Assess your affordability by submitting documents (3 months payslips and 3 months bank statements) to a bond originator
- Conduct a credit check on yourself
- Obtain a pre-approval for a loan amount so you know what price range to look in.
You are now ready to begin searching for property.
Buy to live in
The option of buy to live in is a sound decision, using your rent to pay off your bond. This is an excellent way to save finance in the long term, as the rental prices typically escalate each year, while bond repayments will remain the same. Therefore your rental becomes relatively less each year.
It is also beneficial to pay in extra lump sums as this will significantly reduce interest on the bond repayments.
The first two years of owning property can be financially challenging, as you struggle to meet the new demands of home ownership. As the years go by, the financial burden becomes easier, until you will find that owning your home is extremely cost effective. Getting through the initial two years is worth the strain and effort for your long term financial freedom.
Buy to rent out as an investment
Buying an investment property can bear greater financial fruits then a buy-to-live purchase.
The reason for this is:
- You can target an area with proven high rental returns.
- You can buy in an area with proven high capital gains.
These areas are not necessarily the properties you wish to live in yourself but could make for a wise investment.
Returns on your investment
An investor uses the benchmark of 7% as a good return on investment.
The basic calculation for RETURN ON INVESTMENT (ROI)
ROI = Net Profit / Total Investment x 100
To calculate the net profit of a rental:
Rental income (less) levies (less rates) (less other running costs)
If you purchase an apartment for R 1 500 000 and the rental income is R 10 000 per month with monthly levies and rates totalling R 1500
Your Net profit for the year = R102000 R120000 (R 10000 x 12) less R 18 000(R 1500 x 12)
Your ROI: = R 102000 / R 1 500 000 x 100
= 6,8% return on investment
When buying for investment try to find a property where the rental income mostly covers the bond repayments.
Rental target market
In Cape Town there are 3 rental markets that have proven good returns:
The student market:
- Students typically look for accommodation from November to February.
- Buying close to educational institutions.
- Furnished options often rent more quickly than unfurnished.
The International travel market:
The short-term letting market has boomed in the past five years.
If you wish to purchase for a short-term rental, the property must be close to a tourist attraction, such as the Waterfront.
The local market:
Access to transport routes as well as proximity to business hubs will make rental for the local market more attractive. Buying in these high-demand areas means higher rentals can be charged with lower vacancy rates.
Before buying in an area be sure to know what the vacancy rates are. This can be done by looking at the number of listings online and tracking how many get rented in a month.
It can be done by speaking to a rental agent in the area to get an idea of market trends.
A buyer's agent is a free service and a handy tool for a first-time home owner. A buying service means an agent can advise a buyer on the pros and cons of different areas, give insight into rental returns, assist with negotiating the sales agreement and offer after-sales service, for example applying for the FLISP or dealing with latent defects. (If such a thing would arise.)