Four ways how a single buy-to-let property should make you money
This is what you’ll learn after reading this article:
- Understanding what a buy-to-let property investment strategy is
- How to be sure you will make a monthly income from a property before you buy that property
- How to legally get loads of money back from the taxman
- How to get regular lump sums worth hundreds of thousands of Rands from that investment property, completely tax-free
- How to fast-track your property investment journey by using other people’s money
If you own an investment property, or you decide to purchase an investment property where buy-to-let is the strategy, you should be making money from your investment property in the following four ways. If that is not the case, you are doing something wrong and should probably evaluate your investment, or your potential purchase. Learn how to make money from a single buy-to-let property. Discover the buy-to-let property investment strategy.
What is a buy-to-let property investment strategy?
Tips on a buy-to-let investment strategy
Invest in buy-to-let properties for steady monthly income by purchasing investment properties to rent out. Depending on the market conditions, a further objective is capital growth. There are five ways how such an investment property should make you money.
If your buy-to-let investment properties aren’t generating profit through these five methods, reconsider your investment strategy. If you’re a beginner, this method helps you gauge if your investment is right. Start now and assess!
Let’s discuss these four factors in a bit of detail.
- Monthly income from rent
The number one rule with buy-to-let property investment is that it should make you money from day one. Ensure your monthly rental income covers all expenses: bond repayment, levies, rates and taxes, maintenance, rental agent’s fee, and other associated costs for your property. You may incur additional costs for garden service, Wi-Fi, cleaning services, or any other tenant-offered services that require monthly expenses. End each month with money in your pocket after paying all your expenses. Achieve financial stability with surplus funds, known as positive cash flow. Secure your future by maintaining an excess of money.. Whenever you hear people say that your investment property must cash flow from day one, this is what they mean.
Many people will tell you that it is okay to pay money during the first couple of years. This means that your rental income is not sufficient to cover all your monthly costs. Experience monthly negative cash flow, also known as having a deficit, impacting financials adversely. Optimize cash flow for sustainable profitability.
In other words, your monthly expenses are more than your monthly income on the property. According to experts, the property’s value will increase over time, allowing you to recoup your investment, or generate positive rental income within a few years. No property investment coach can accurately predict the future of your investment. Nobody knows what will happen. There is no investment specialist, regardless of expertise, who could have predicted the COVID-19 pandemic and its impact on the global economy and property market.
By contributing to the monthly expenses for a tenant’s property, you are actively subsidizing their lifestyle. That tenant is now living in a place that he cannot afford, and you are helping him to live there.
So how do you make sure you will make a monthly income from a property before you buy the property?
My business partner and I purchased four two-bedroom, one-bathroom units in a townhouse complex, generating R415.50 monthly income per unit after deducting all expenses.. Increasing the rent annually ensures that the rental income grows faster than inflation, resulting in consistent income growth. Start with a small cash flow, and watch it grow into a bigger amount. It’s perfectly fine to see positive progress. As long as you don’t ever find yourself starting out with a negative cash flow amount.
So how do you make sure you earn an income from day one?
Tips on making income from day one!
You first determine what the average rental income is that you can fetch in a particular area or suburb. So, let’s say you are interested in making an offer on a 50 square meter, two-bedroom, one-bathroom apartment, how do you know up front you are looking at a good deal? Well, you go onto the property portals to do some desktop research. The two most popular property portals in South Africa are www.property24.com and www.privateproperty.co.za. Now remember, you must compare apples with apples. Discover rental prices for similar two-bedroom, one-bathroom apartments of 50 square meters in the same area. Explore now! Identify eight such properties, add up the monthly rent charged to each of the eight properties, and divide that amount by eight (the eight properties). You’ll discover the average rental income for a rental unit of that type in that particular area.
You might be buying in an area where there are not many apartments TO LET at 50 square meters. In this case, you look at eight two-bedroom, one-bathroom apartments on the property portals. However, instead of just getting the average price of the units, you also get the average square meterage of the units. Property rental prices are influenced by property size. Consider the size of properties when determining rental rates. So, after you have done the calculation, you will get an average price per unit and an average square meterage per unit. This will give you a good idea of what monthly rental income you can get for your unit.
Discover the monthly rent paid by the current tenant of the unit you want to make an offer on. Ask the real estate agent for details.
Let’s refer back to the four rental units that my business partner and I recently bought. After doing much research we’ve established that we can get a rental income of R6750 per month.
Now look at what your other monthly costs will be:
Levies and municipal rates and taxes
Now that you know what monthly rental income you can get for your buy-to-let property, you continue to look at what the other monthly costs are to consider. The property advertisement on the portals will normally also have the levies and the rates and taxes amount. If it doesn’t have this information, you can get it from the real estate agent who has placed the advertisement. Supercharge your property offer in a sectional title scheme: Enjoy inclusive building insurance with the levies. Unlock peace of mind! This means you don’t have to take an additional amount into consideration for building insurance.
The levies on our four units were charged at R900 per unit and the rates and taxes amounted to R350 per unit.
The rental agent
Research rental agents’ fees for tenant placement and property management in your area. To find the best rental property, contact local agents from property portals and inquire about their fee structure. Act now! Call about four to six agents, add up their monthly fees, and get the average. This will give you an amount to work with.
After speaking to a couple of rental agents in the area, the most affordable rental agent with a good track record, and who offers the most comprehensive tenant sourcing and management services charged nine percent of the rental income, but because we were going to give them four units to manage, I have managed to negotiate their fee down to seven percent of the monthly rental income. This means the monthly fee per unit for a rental agent’s services came to R472.50.
A property requires ongoing maintenance. Landlords are responsible for promptly fixing any property damages caused by general wear and tear. Take charge and ensure repairs are addressed. You also often may have to paint the entire unit on the inside before a new tenant moves in. All of this cost money; money that you need to provide for. So ideally you want to budget a small fee for maintenance every single month. If you are renting out a two-bedroom, one-bathroom unit, then two to five hundred rands a month should be perfect.
Since the four properties that we bought are in a relatively new complex (5 years old), and all four units are in perfect condition, we’ve decided that we only need to allocate R200 per unit. Chances are also very slim that all four properties will require maintenance at the same time.
Figure out what your monthly bond amount will be
Tips to figure out your monthly bond amount
You now know the potential monthly rental income for your property, along with the costs of levies, rates, taxes, rental agent, and maintenance.. Now you look at what your monthly bond will cost.
Discover the incredible Ooba Home Loans App, revolutionizing the way you secure your dream home. Experience the future of hassle-free home loan applications. This App will calculate your monthly bond amount for you. It is a free App, and you can download it from the App Store. There are different calculators. You go to the ‘Bond repayment calculator’. Enter the purchase amount, loan duration, bank interest rate, and deposit amount to calculate your home loan. If there is no deposit, you can just leave that space blank.
Our monthly bond repayment per unit amounted to R4412 per unit.
Knowing what your monthly bond amount will be, also helps you decide what offer to make on the property. Experiment with various offer amounts to find the one that ensures a monthly positive cash flow, letting you play comfortably. It also helps you to make sure that during your negotiation you don’t ever offer more than what you should. It helps take the emotions out of the deal-making and you only rely on the calculations. Remember, this is not a home that you are buying to live in. It is an investment decision. The numbers never lie. If it doesn’t make sense, you move on. There are lots where that came from.
So let’s bring this whole exercise into perspective:
Rental income of R6750 per month
LESS: R900 levies per month
R350 Municipal rates and taxes
R472,50 for a rental agent
R200 for maintenance
R4412 for the monthly home loan repayment
Equals: A positive cash flow of R415,50 per unit
“Start strong: Save and reinvest this positive cash flow amount towards deposit and transfer costs for your next property, not for living expenses.”. This is part of how you grow your property investment portfolio.
- Tax savings on your investment property
Maximize Your Investment Returns with Tax Savings on Your Property
The second way how a buy-to-let investment property can make you money is through tax deductions (we discuss this in great detail in the article on ‘Tax savings on your rental property’). Slash your monthly expenses and deduct them from your annual tax return. Save money effortlessly by leveraging tax deductions.
Maximize your tax deductions: Claim maintenance costs, rates, taxes, insurance, interest on bond repayments, rental agent’s fee, and other services like DStv, garden maintenance, and Wi-Fi. Whether it is a monthly expense or a once-off expense during a particular tax year, you can claim it back from the tax man.
So how do you make money here?
Remember you have to pay tax on the income that you derive from your buy-to-let property. SARS deducts every cent spent on property maintenance and tenant services from your tax debt. Maximize savings by leveraging these deductions. Here is where it gets even better: if your tax deductions add up to be more than your rental income, you save on tax that you need to pay from your other incomes like a salary for instance.
Why would the tax man be so generous?
There is a huge housing backlog and the government cannot keep up with the housing demand. The country knows it will never get to provide enough housing to all its citizens. When you offer to help the government provide houses to the people, they respond gratefully and reward you with tax incentives. This way more people become property investors and in turn help the government provide accommodation for more of its citizens.
Tips on working with tax consultant
You want to keep all your invoices and receipts, and you want to have a particularly good tax consultant. I manage a spreadsheet with a rental income column and monthly expenditure columns for the entire tax year. I give my tax consultant my spreadsheet and electronic copies of all my invoices at the end of each tax year. Tax consultants charge less for their services when they have less work to do since they typically charge by the hour.
Generally, most tax consultants only do the minimum, limiting your tax returns. Maximize benefits by choosing proactive professionals. So, I will advise that you read up about the subject matter as much as possible. Let your tax consultant know you’re knowledgeable and won’t tolerate shortcuts that jeopardize your wealth. Be informed and assertive. Discover valuable strategies for maximizing wealth while minimizing taxes. Unlock financial freedom with “Tax-Free Wealth” by Tom Wheelwright, Robert Kiyosaki’s tax advisor. Discover valuable strategies for maximizing wealth while minimizing taxes. I always say you can have the best team in the world, but no one will look after your money like you would. That is just how it is.
You must keep your thumb on all your affairs. Most people who lose their money put all their trust in consultants. Yes, let them do the work you don’t want to do or have time to do. Having an expert manage every aspect of your life is great, but avoid relinquishing total control. Stay informed about every aspect of your life, regardless of the expert assistance available to handle it for you. Knowing what tax deductions you can claim is crucial, and it’s essential to understand the rules and limitations. As they say, always pay your taxes, but there really is no reason to tip the tax man.
- Equity extraction
Tap into the Power of Equity Extraction
The third way to make money from your buy-to-let investment property is through equity extraction. This is a great one. Equity extraction means that you take equity out of your property. Let me explain how this works. Let’s say you owe R800 000 on the investment property, but the market value of the property is R1 100 000. The difference between the two is R300 000. This R300 000 is the equity that you have in the property. Get tax-free cash effortlessly—it’s practically free money! You can take the money out of the bond to either re-invest or to put towards a deposit on one or two more investment properties. I love how investing in property feels like winning the lottery every few years, making it my favorite money-making method.
Let me share a personal example. I had an investment property on which I owed R900 000 at the time. This is when I chose to extract equity from the property, which means taking out the difference between my debt and the property’s market value.
I notified the bank that I would like to refinance the property and they got a valuer out to the property to establish how much I can refinance the property for. The valuer established that the property is worth R1 600 000. This meant I could take R700 000 equity out of the property.
Ensure positive monthly cash flow before withdrawing money from the property. Don’t proceed blindly; evaluate financial viability first. Remember, you never want to pay in. This is not how we invest. Luckily over time your rental income increases. The value of your property also increases. This is referred to as capital growth.
Reinvest using property equity for maximum returns. You use your money to grow your wealth. You don’t want to live off your investment too early.
I took my free R700 000 which was literally just given me to, completely tax-free, and I reinvested it. I reinvested some in my business, some in the stock market, and used some as seed capital for my own business. Can you imagine if you have two or four or even ten properties where you extract equity out every couple of years? See why it is my favorite one. It is just such an enabler.
Remember I said earlier in this article you make your money when you buy? Ensure monthly income and capital growth by prioritizing expenses and managing finances effectively. Invest in high-growth areas for rapid property value appreciation within a short timeframe. It is not always easy to determine capital growth, and if you do, it becomes a very complicated calculation.
So let me share a quick way to determine potential capital growth in an area. Look at what is happening in the area. Look at what are the trends in the area. What are the amenities in the area and what amenities are available in the area? Gautrain service sparked massive property growth in Johannesburg station areas. There were a bigger demand and more people wanted to live or work near this top-class train service. Also look out for things like malls, hospitals, public transport routes, and commercial and infrastructure developments. Join the growth of a valuable area. These signs indicate its potential. Don’t miss out on being a part of it.
The property where I extracted R700 000 worth of equity was near two universities, a public hospital, a private hospital, the SABC’s head office, on the city’s newly developed bus routes, and the area was one of the nodes that were earmarked by the City of Johannesburg to be developed into high-density areas over time. It ticked all the boxes for great capital growth.
Another few properties that my business partner and I bought was in another city in an area that was under huge developments, both commercial and residential, it was near a major shopping mall, and it was surrounded by high-value suburbs. All the signs pointed towards tremendous capital growth in a short amount of time. Again, you make your money when you buy.
Harnessing the Potential of Leverage
The fourth way how you can make your money is through leverage. Leverage basically gets you there faster by using OPM (Other people’s money). Let me explain. If you want to invest in the stock market, you have to do so with your own money. It takes you much longer to achieve your financial goals. Don’t get me wrong. I love the stock market and it is a great asset class, but it is not property. No one will lend you money to invest in the stock market.
But with property investing, you can actually use the bank’s money to invest. The bank will give you +/ 70% to 100% of the money needed to buy an investment property. Now you have this investment that cost you nothing, but from which you get all the financial benefits that I’ve listed above.
Every single investment property that I have bought to date was through leverage. The bank literally lent me money to buy investments, and because I was clever about the properties that I bought, I became a landlord who made money from day one, with huge capital growth, and the investment was made with other people’s money (the bank in this instance).
A business associate of mine actually used a great metaphor once. He said, imagine using a car to drive from Johannesburg to Durban. It will take you five hours and lots of toll fees. However, if you fly, it will only take you forty-five minutes. You leverage the airplane to get you to Durban faster.
All you need to take from this segment of leverage is that you use other people’s money to reach your property investment goals faster. If you had to wait to get the money together to buy a property cash, it would literally take you years to get there.
That brings me to the end of four great reasons to invest in property. If this article did not inspire you to invest in property, then perhaps property investing is not for you.
Last updated: 4 February 2023