Secrets to a successful buy-to-let property investment strategy

Feb 8, 2021 | Featured, Property Investors

Secrets to a successful buy-to-let property investment strategy
After reading this article, you will know:

  1. What a bad buy-to-let property investment strategy is and why you should stay away.
  2. Why your first step is to find out what home loan amount you qualify for.
  3. How to calculate the potential monthly rental income on a buy-to-let unit.
  4. How to calculate the monthly bond repayment on a property before you make an offer.
  5. How to calculate all the other monthly costs on a rental unit.
  6. How to see if you will make a positive or a negative cash flow every month.
  7. How to re-work the numbers if your calculations are giving you a negative cash flow amount.
  8. When to draw the line and move on to the next deal.
  9. Why the area is especially important for your buy-to-let strategy.
  10. Why even though income is important, capital growth also plays a big role.

What is a successful buy-to-let property investment strategy? Let’s consider the short answer first. A successful buy-to-let property investment strategy is where you earn a monthly income from your rental property after you have paid all your monthly expenses. This is referred to as positive cash flow or a positive net operating income. 

Before we unpack the secrets to a successful property investment strategy, let’s first understand what a bad buy-to-let property investment strategy is. 

Avoid listening to individuals who claim it’s acceptable to delay making money initially or assert that your rental income will become positive within two to three years. These individuals lack the ability to accurately predict the future and may mislead you. Consider the impact of unforeseen events like the Covid-19 pandemic in 2020, resulting in widespread job losses and a decline in rental prices. Where are those individuals now who confidently promised you an income from your investment property two years back in 2018? It’s crucial to approach such claims with skepticism and prioritize thorough analysis and realistic expectations when it comes to your rental property’s financial prospects. 

Secondly, if you have to pay money every month, it is not an investment. What you are doing is subsidizing your tenant’s lifestyle. Your tenant gets to stay in a property that he cannot afford, and you are helping him financially to stay there. If your rental income is R6000 per month, but the property is costing you R7000 a month, you are subsidizing R1000 per month towards your tenant’s lifestyle. Over a period of a year, the property would have cost you R12 000. Over a two-year period, it would have cost you R24 000. And the beat goes on, and on, and on, and on. You get my drift. 

So, before I move on, I’m going to say it one last time; never ever let anyone tell you that it is okay to pay in during the first couple of years, because it is not okay.

First things first

Check your credit score

You always want to know what your credit score is, because if it is average to below average you may want to get it up to good or excellent. The better your credit score, the better your chances are of getting approved for a home loan and the better you can negotiate the interest that you will be paying on the home loan. There are many credit bureaus, and with most of them, you are entitled to one free credit report per year. However, with www.clearscore.com/za you can draw free credit reports as many times as you like. This is very handy to have, especially every time you are in the market for a property.

Get pre-approved

Before you even go out and look for properties to buy, get pre-approved and know what the home loan amount is that you qualify for. You can get pre-approved by any bond originator. It is free, and you are under no obligation to use their service. Having said that, you want to build relationships with people, and when you ask a bond originator to do a pre-approval for you, you may want to use their services. 

Great. Let’s assume your credit score is excellent and you qualify for a one-million-rand home loan. We can now plan our strategy around what we know we can afford. This is great. Remember, clarity is power. So, without further ado, let’s get you on your way to becoming a successful buy-to-let property investor.

 

An income-generating asset

Create Wealth: Harness the Potential of an Income-Generating Asset

A buy-to-let property should be an income-generating asset from day one. There is an extremely easy calculation that you can use to make sure you are making an income from day one. So, let us take a closer look: 

Determine what is the monthly rental income that you can get for your buy-to-let unit

When you come across a unit that you are thinking of making an offer on, first identify what the monthly rental is that you can charge for the unit. Let’s say you are looking at a sixty square meterage, two-bedroom, one-bathroom unit in a secure complex. You now need to look at what rental income other two-bedroom, one-bathroom units are fetching in the same area or suburb. How do you do that? You do a quick desktop research by going to the property portals like www.property24.com or www.privateproperty.co.za. Let’s say you are looking to make an offer on a two-bedroom, one-bathroom unit in Menlyn in Pretoria East, you go to the filters on these property portals, select Menlyn properties to rent, and you further select two-bedroom, one-bathroom units. There will now be a range of TO LET properties coming up in your search. 

You now need to determine the average rental charged in the area. So, go down the list and write down the rental amounts of the first eight, two-bedroom, one-bathroom units that are being advertised. You now add up the amounts for the eight units, get the total, and divide that by the amount, of units that you used in your calculation, in other words, you’ll divide the total amount by eight. Your answer will be the average rental income. 

Now we need to take this calculation one step further. Not all the two-bedroom, one-bathroom units will be the same size, so you need to look for the square meterage in each advertisement and repeat the same exercise where you determine the average square meterage. Again, you add up the square meterage of the eight units, get the total amount, and divide it by eight to get the average. 

Now that you have the average rental price for a two-bedroom, one-bathroom unit, and you have the average square meterage for that unit, you can look at how your sixty-square-meterage, two-bedroom, one-bathroom unit compares.

So, let’s do the calculation for the first eight two-bedroom, one-bathroom units that you see in Menlyn:

Unit Rental Income Square Meterage
1 R7 500 60m2
2 R7 000 55m2
3 R8 000 70m2
4 R7 800 65m2
5 R8 200 85m2
6 R8 500 90m2
7 R8 300 85m2
8 R7 200 55m2
Total R62 500 565m2
Average R7 812.50 70.625m2

 

Now you can see that the average rental income that you can get for a two-bedroom, one-bathroom, seventy square meterage unit is R7 812.50. This means because your two-bedroom, one-bathroom unit is slightly smaller than the average you should get a rental income of about R7000 per month. 

Determining what the monthly bond will be on the property

Now that you know you can get about R7000 rental income per month for your unit, you can move to the next part of your calculation, which is to determine what your monthly bond amount will be. Start with the listed amount. 

Let’s say the property is listed at R850 000. 

The best way to figure out what your monthly bond will be is to download an App called Ooba. You can download it for free from the App Store. The Ooba App is a home loan calculator with a variety of calculators where you just type in your information. Once you’ve downloaded the App, you’ll go to the BOND REPAYMENT CALCULATOR on the App. All you do is enter the purchase price and the deposit if you’ll be giving a deposit. You press ‘CALCULATE’ and it will give you the monthly bond repayment amount. The interest rate and the bond repayment period are already included in the calculator. 

As per our example, the asking price for the unit that you are interested in is R850 000. So, you enter that amount, and let’s assume you are applying for a 100% bond, then you will just enter a zero where the deposit is supposed to go. You press ‘CALCULATE’ and the monthly bond repayment in this instance will be R6 590.04.

Other monthly costs to consider in your calculation

Essential monthly expenses to factor into your calculations

At this point, we’ve established what monthly rent we can get every month and we know what the monthly bond amount will be on the unit. Now let’s look at the other costs to consider in your calculation. 

Levies & Rates and Taxes

The monthly levy amount and the rates and taxes should be displayed on the property advertisement. If not, you can ask the real estate agent for the figures. I would suggest you get proof of these costs. In other words, ask the real estate agent for the most recent statement on the property. Here you will be able to see what the actual monthly amount payable is. You will also see whether any special levies have been lifted in the complex, or whether the CSOS levies have been added. 

Now, let’s assume the monthly levy amount is R1000 and the rates and taxes are R350 per month. We’ll come back to this calculation. Let’s just consider all the other monthly expenses first.

Rental agent’s fee

As a successful buy-to-let property investor, you don’t want to have to deal with tenants yourself. Your job is to grow your property investment portfolio. So, you want to get a rental agent to do the tenant placement and the management of the unit. However, this service comes at a cost. Different rental agents charge different amounts. This can be anything from 7% to 15% plus VAT, of the monthly rental amount. 

The best way to find rental agents in the area is to once again go to www.property24.com and www.privateproperty.co.za. Go to rentals and type in the suburb where the unit is that you are thinking of buying. Scroll down and look at who are the most visible rental agencies in the area. 

There are two types of rental agents that I have personally dealt with. The one is your smaller entrepreneurial agency. Since looking after your unit is literally their bread and butter, they tend to give very good service and will often go out of their way to assist you. They are entrepreneurs and they also think that way. 

Where the bigger rental agencies may have an upper hand is that they have more systems and processes in place. They may also have a bigger marketing department and will be able to place a tenant easier. Their fees are also often lower because they work on volumes. 

Having said all of this, you ultimately have to identify the rental agent that is the best for your needs. So, call up at least three rental agents in the area from the two property portals. Let them know that you are a potential new landlord in the area and are looking around for a rental agent. Find out what their monthly management fees are and whether they are prepared to negotiate on these fees. Remember for now you are busy with your calculations, so you are mainly interested in their fee structure, more than a formal interview. That will only happen once the property has been registered in your name. 

Let’s assume the three telephonic quotes you got from the rental agents are 9%, 11%, and 13% of the monthly rent, I would advise that you use the most expensive fee in your calculations. We always want to work with worst-case scenarios. This way we know we are covered later on. When we get to the point of having to commission the rental agent’s services, you can negotiate a potentially lower fee. Any saving over and above your calculation is a bonus, but any loss over and above your calculation can be devastating. 

Remember, we said that the potential monthly rent that we can get for our unit is R7000. This means 13% of R7000 (7000 x 13%) is R910. 

Maintenance

Consider the last cost in your calculation: maintenance. Remember, maintaining a rental unit is essential. The law requires the unit to be habitable for tenants, meaning everything should be in good working order. However, things can break unexpectedly. One month, you may need to fix a toilet, and a couple of months later, an electrician may be required. Repainting the unit may also be necessary every few years. It’s crucial not to use funds meant for other investments or growing your property portfolio for these expenses. A successful buy-to-let investor sets aside a monthly amount for maintenance. This ensures peace of mind and immediate attention to any problems that may arise. Happy tenants tend to stay longer, making it a win-win situation.

A safe amount to budget for maintenance per unit every month is R500. 

Now we know what the potential rental income is that we can get for the unit every month, and we also know what all the associated monthly costs are. So, let’s see if this deal makes financial sense or not.

Description Monthly Amount
Rental income

 

LESS:

Monthly home loan repayment

Levies

Rates and taxes

Rental agent

Maintenance

 

R7 000.00

 

 

R6 590.04

R1 000.00

R350.00

R910.00

R500.00

 

Monthly cashflow -R2350.04

You can see that as the deal currently stands, it is definitely not worth it. If you had to buy this unit without doing the numbers, it would have cost you R2350.04 out of your pocket every month. This is most definitely not an investment. Don’t you just love how the numbers never lie? This is why it is ultra-important for property investors to run the number on every potential deal. Sometimes a deal might look great from a distance, but when you run the numbers, you get a completely different picture; a more accurate picture, which will allow you to make more accurate investment decisions.

At this point, you don’t walk away. You can still see if you can make the deal work. Now you look at what your options are. You cannot change levies, rates and taxes, rental agent fees, or maintenance, but you can change your monthly home loan repayment amount. There are three ways how you can do this: 

  1. You now start negotiating with the seller for a lower price,
  2. You may have some money that you can put towards a deposit. A deal should never require more than a 20% deposit for it to make sense. 
  3. You can recalculate the bond repayments over a thirty-year period instead of a twenty-year period

Negotiating with the seller

Get insight from the real estate agent as to why the owner is selling. It might be an urgent sale where the seller is desperate to sell. Since he is desperate to sell, he may be more open to offers from potential buyers. Urgent sales may be because of financial reasons, death, divorce, or immigration, or he may need the money to reinvest in something else. Never be afraid to make a cheeky offer. You never know. 

You also want to do a comparative market analysis. In other words, you want to see what other similar units sold for in recent months. This way you have more ammunition when you go and negotiate with the seller. You also want to check how much the seller paid for the property and how long ago did he purchase the property. You can get this information from www.lightstoneproperty.co.za. This is a website that has information about every single property that has ever been sold in South Africa. Real estate agents also use www.lightstoneproperty.co.za to do their own market analysis and valuations on properties. You can draw property and suburb reports from Lightstone and these reports cost anything between R80 and R200. You can also subscribe and pay a monthly subscription and draw as many reports as you like. This is a great resource for every successful property investor to have

Putting your own money towards a deposit

Reduce Your Deposit: Smart Strategies to Minimize Your Financial Contribution

The less money you have in the deal, the better. Ideally, you never want to put more than 20% of the offer amount towards a deposit. If you have to put more than a 20% deposit towards a deal to make it work, it is not a good deal, and you should rather move on to the next deal. 

So, remember the listing price of the property was R850 000. Let’s assume the seller is prepared to commit to a sales price of R700 000 and nothing less. Let’s further assume we have 10% that we can put towards a deposit. This means a deposit of R70 000 and a bond amount of R630 000. 

Now we go back to our Ooba App and do the calculation on the BOND REPAYMENT CALCULATOR.

After you’ve punched in all your adjusted figures the new monthly bond amount comes to R4 884.38

Let’s run our numbers again, based on the new information:

Description Monthly Amount
Rental income

 

LESS:

Monthly home loan repayment

Levies

Rates and taxes

Rental agent

Maintenance

 

R7 000.00

 

 

R4 884.38

R1 000.00

R350.00

R910.00

R500.00

 

Monthly cashflow -R644.38

As you can see, the deal is still not making sense. As we said right up front, we don’t want to be paying a cent of our own money. If we have to do that, it is not an investment, and all we are doing is subsidizing your tenant’s lifestyle. 

I purposefully chose to run the calculations on a deal that does not make sense, because this is what most of your deals are going to look like when you run the numbers. Don’t be discouraged. Remember, if it were easy, everybody would be investing in property. Robert Kiyosaki talks about the 100/10/1 rule. You are likely to run the numbers on 100 properties. Out of those 100 properties, you will make offers on 10, and only one will be accepted. 

The good thing is, the more you do something, the better you become at it. You will get to a point where you will run the numbers on a deal in just a few minutes. You will know in no time whether the deal makes sense or not, and you’ll move on to the next one.

Other factors that play a role in a successful buy-to-let property investment strategy

Key Factors Impacting a Successful Buy-to-Let Property Investment Strategy

Choosing a suburb or area

You want to be sure that there is a rental demand in the area that you are choosing. Again, go to www.property24.com and www.privateproperty.co.za and have a look at how many units are being listed TO LET in the area. Look at how long those listings have been sitting on the property portals. If they have been there for more than a month there might be an over-supply of buy-to-let properties in the area. 

Consider the infrastructure in the area. Is public transport accessible in the area? Are there schools and hospitals in the area? Are there shopping centers in the area? Is the area close to places of work?

Capital Growth

Key Factors Impacting a Successful Buy-to-Let Property Investment Strategy

Now many experts will say to you when you choose a buy-to-let property investment strategy you only consider the monthly income. And that is absolutely right. Income is king when you follow this strategy. However, you don’t want to dismiss capital growth completely. In other words, over and above the monthly income, you want to invest in an area or suburb where your asset (your property) will grow in value. The bigger the value of your property the bigger your net worth. Also, the better if you want to refinance the property and take money out of the property to use towards another investment. I will never dismiss capital growth. 

Higher capital growth properties are often based in areas where there is a lot of infrastructure, commercial development, amenities, and more affluent suburbs. 

In a compromised situation, like a post-Covid slash low-interest rate environment where rental demand is generally lower, your higher capital growth areas might be performing much better. Just to give you an example; I have rental properties in areas where there is not much capital growth. In fact, there is not much growth in those areas, but there has always been rental demand in those areas. However, after Covid-19 the rental demand in that area went down so much that I drastically had to lower the rent to occupy the unit. 

On the other hand, I also own buy-to-let properties in more affluent areas with higher capital growth. Here the rental demand remained and what I could charge for rent remained the same. If a property goes vacant, I have so far been able to secure a new tenant within less than a week. 

So, even though we invest for income when it comes to buy-to-let properties, capital growth properties and the type of area sure also has its advantages.

Conclusion

Even though there are still lots more to consider when you purchase a buy-to-let property, the points given in this article will surely get you started, and well off to buying that first investment property. 

 

Happy investing. 

 

Last updated: 12 March 2023

 

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