Rowan Alexander still much in favour of buy-to-let property investment
Category Advice
Pertinent questions from Abongile Nzelenzele, Jeremy van Wyk and Pippa Hudson on the Cape Talk radio station, were sparked off by an article Rowan Alexander, Director of Alexander Swart Property recently wrote. He covered many aspects that could (and should) be considered by those interested in the benefits of buy-to-let investment property.
Acknowledging that the property market been under pressure for some time now, that rentals are low and that vacancies are at a new high, Alexander said it was due to a mix of political and economic factors. However, he said, in recent months confidence has begun to return to the market because there is now greater clarity in the political sphere - especially regarding future economic prospects and the thorny subject of land expropriation. Home owners are now far less fearful that their properties are under threat because these homes are unlikely to be an expropriation target.
On the economic front, said Alexander, the current downturn has made prices more affordable and now is an excellent time to buy. Like other markets, property is cyclical and those who invest now, will benefit from the eventual upturn - those who wait for an improvement will not. In the current economic climate, 20% to 25% deposits are now less frequently available. Such deposits enabled investors to cover their monthly bond repayments with rentals received, from Day One. To achieve a situation in which there would be no shortfall on bond repayments from the outset now, the investor would probably have to raise a deposit of 40% of the sale price.
In today's market, the buy-to-let investor should commit to a seven or eight year ownership period and opt for a smaller or no deposit. During that period, even those with a 100% bond will find that their rents have risen to the point where they cover the monthly bond repayments fully. Over the same time the value of the property will probably have increased by 100%. Recommending this type of investment (i.e. a 100% bond) to the man-in-the-street without great resources, Alexander said the deposit paid over a six to seven year period, would in fact amount to only about 15% of the initial purchase price - this wouldprobably not be difficult to meet because of the extended repayment period.
The strong likelihood of all properties experiencing a significant capital gain, is often ignored by those who simply compare investment in property with investments in the money market. Such people usually want an immediate 7% to 8% return, but are not looking for long term capital growth. Stressing again the necessity of property investors taking a long term view, Alexandersaid that those who hope to make a quick in-and-out profit in the today's property market e.g. in 24 months (as was sometimes possible in previous times) are almost certain to be disappointed. The investor should define his goals at the outset: is he looking for an immediate regular income or is he looking for capital growth? In general high rental return properties have slower capital growth, while big capital growth appreciation is often accompanied by lower rentals.
Answering a question about the costs which are tax deductible on a buy-to-rent property, Alexander said that operational/running expenses, including insurance, agent fees, interest paid on the bond, upkeep, maintenance and security, are all tax deductible -this can make a big difference to the profitability of the investment.
Alexander's final advice to the radio listeners was that the pessimism some people feel about buy-to-let is simply not justified. Granted that the conditions for such investments have changed, it is still the ideal way for the under-resourced investor to get into a satisfactory asset portfolio. If able to raise a bond, the investor is in effect getting capital growth on the loan money, not on his own capital input. In most cases this means that a 300% return on the capital laid out, is achieved in five to seven years. There is so much misinformation around (some by so-called experts) that the investor must take care to educate himself on property matters. If this is done thoroughly, he will be well set to make a sound investment. (Alexander Swart Property run a free property investment workshop on the first Wednesday of each month.)
Author: Independent Author
