Doing your homework
Once you have decided to begin investing in property, you will need to do your homework before rushing out to buy the first house you can find.
These are the things you should consider:
1) Decide on a niche
In order to make an informed purchasing decision, you need to know what the market-related selling prices and rentals are. Since it is very difficult to be an expert on all types of properties in all areas, it is usually a good idea to decide on a niche you will target. For example, you could choose to focus on townhouses within a certain area.
Once you have decided on your niche, you can focus your research on it.
2) Observe market trends
Watch the trends in your chosen market for some time before taking an investment decision. You should know what the rental and buying demand is like, and whether it is increasing or decreasing. Are rental yields going up? Are selling prices going up? Try to establish whether changes in demand are related to the area only, or to variations in the general economy.
Remember, you will be buying with a long-term view so always satisfy yourself that the area you are looking at will continue to be sought-after by renters (and buyers) in the future.
3) Understand tax
As an investor, you need to know what the tax consequences of your investment will be. Typically, any rental income you receive will be included in your taxable income but maintenance expenses, rates and interest on the bond can be deducted. You could quite easily end up with a tax loss in the first few years which could be set off against your other taxable income.
Capital improvements to a property cannot be deducted, but will reduce the profit on sale taxed by SARS.
When you sell a property that you bought to earn rental income, there will be capital gains tax on any profit you make. It is important to note that if your original intention was to buy a property and then resell it for a profit, the profit could be taxed at normal income tax rates!
Get tax advice from your accountant before investing.
4) Understand tenant rights
If you rent out a residential property, there are two legal elements you must be aware of. In general:
– If you ever decide to sell, the lease agreement that you signed with your tenant will take precedence over the subsequent sale agreement. This is the “huur gaat voor koop” principle. What this means is that any change of ownership has no effect on the lease; the tenant just makes payment to a new landlord. This could limit potential buyers to only those who don’t mind the fact that there is an existing tenant so it is not advisable to sign a new long term lease just before you decide to sell.
– You need a court order to evict a tenant who stops paying. Not only can this take 3 months or more to obtain, but it is not a foregone conclusion that the court will even agree to evict. In terms of SA law, the court will consider the rights and needs of tenants who are vulnerable: the elderly, disabled persons, children, and households headed by women. The court could therefore decide, in the particular circumstances, that it would be too harsh to evict the tenants even though they aren’t paying the rent. The lesson is to carefully screen any potential tenants first and to consult a good lawyer.
There will always be unforeseen surprises (good and bad) but your aim should be to control everything about your investment that you can. Read widely, keep up-to-date and understand your niche before investing.
David de Waal (CA(SA))
Low cost estate agents
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