When growing up, there were inevitably times when your parents emphasised the need to invest as soon as you could when you had “a real job”.
And what was the number one thing to invest in? Property.
Property is stable, property appreciates in value and can also be used as a secondary income should you purchase a second home to rent to tenants.
But is it all smooth sailing as soon as you purchase your ‘Buy to Let’ (BTL) investment, find suitable tenants and wait for the money to pour in?
What are the Realities of Buy to Let?
- Housing remains a primary human need
Buy-to-let properties give a satisfactory capital growth in the long term as housing will always be in demand. In certain areas, there are usually stock shortages, especially in the city and its surrounds. It is important that before you purchase a BTL property, you check out the area. An area can become seedy in no time at all which will affect your ability to keep your BTL consistently rented.
- Working in the industry
If you are involved as a developer, real estate agent or builder in the property industry, chances are you will be able to purchase a BTL property for a bargain. Eliminating the transfer fees that come on top of your purchase price also doesn’t hurt either.
There is also additional opportunity for a lot of insider information such as up and coming properties that might surge in the future which would make a BTL investment worthwhile.
- Tax efficiency
Your BTL investment will come in handy when paying for your own mortgage as you can borrow from the BTL property to pay off your primary home loan. This will shift the interest expense deduction which then reduces the rental income profit earned. With less profits earned, the tax burden is made lighter.
- Non-paying tenants
Unlike a listed property that you choose to sell, there are a number of risks involved when dealing with tenants. According to the Tenant Profile Network monitor, 68% of tenants in the second quarter of 2016 paid on time while 6% paid within the grace period and 11% paid late. A total of 15% of tenants did not pay at all. This, of course, can lead to legal action.
- Rising interest rates
Should your investment property be mortgaged and reliant on tenant occupation, the risk of rising interest rates cannot be passed on to the tenant. This can put you as the investor in a financial predicament, even if a tenant is currently renewing their rental contract with you.
A sharp increase in rent can often result in a tenant moving out as they simply can no longer afford to live there.
- Income tax
Unbeknown to many first-time property investors, any property that you ‘buy to let’ will receive income tax. Residential income tax pertains to an individual renting out a property and receiving a rental income. This includes holiday homes, bed-and-breakfast establishments, guest houses, sub-renting a part of your home and renting out an entire house.
Certain expenses can be deducted from your total taxable income. These include rates and taxes, bond interest, advertisements, agency fees, insurance, garden services, repairs in respect of the area let and security and property levies.
It is important to remain up to date with the latest developments and residential information to ensure your investment goes as plan. Chat to Faircape Sales and Leasing for ideas on the best areas to invest in. Faircape agents are experts in their area and, as a result, know the ups and downs of the very venture you wish to explore.