The decision to invest in buy-to-let property should be a carefully considered one. Besides the associated costs of owning a rental property, there are a number of risk factors which investment property owners should be aware of. For those wanting to navigate the rental property space, here’s a complete guide to what it entails.
Commission: The seller of the property is responsible for paying the estate agent’s commission. According to Ooba, the standard estate agent commission rate in South Africa is 9.75%, although this is often negotiated. Gearing: Gearing is the practice of borrowing money from a bank to fund the purchase of your investment property. As such, investment property is one of the only asset classes that you can finance with borrowed capital. Borrowing money to purchase a property allows you to generate wealth over time as the value of the asset appreciates and the bond amount decreases as a result of using rental income earned to reduce the bond.
Joint ownership: If you and a partner or friend intend to purchase an investment property jointly, be sure to put the appropriate legal agreements in place to protect your interests. Joint ownership of property comes with a unique set of challenges so it is vital to ensure that your agreement clearly sets out who is responsible for what costs, when the properties will be sold and a strategy should one partner want to exit the arrangement.
Ongoing costs: Calculating the ongoing costs of owning a rental property is important as you will want to ensure that these costs do not eat into your profits. These costs could include water and electricity, Wifi, armed response, levies, garden and cleaning services, and so on. Rates and taxes: The rates and taxes on your rental property will depend on the municipal valuation of the property which in turn is based on the market value. Each municipality sets its own rates which are dependent on the use of the property and the geographical location, so be sure to ask your estate agent for these numbers.