Buying a second property

Craig Hutchison, CEO of Engel & Völkers Southern Africa said: "Historically, no one can dispute the statistics that property values increase over the long term and outperform many other forms of investments."

"Due to the current financial situation globally, getting a second bond is challenging, but not impossible," said Sandy Reddy, head of origination of Engel & Völkers Financial Services. Second-property buyers must have at least a 10% deposit and, when applying for this bond, will need to prove that their expenses do not exceed the legislated amount of the bond monthly repayment. The buy-to-let market is growing significantly as many young South Africans require housing and cannot afford to buy it themselves.

Hutchison said that buy-to-let investors are more sophisticated today. They focus on buying an asset that produces a solid income stream, rather than hoping just for property-price appreciations. The capital growth rate currently makes residential investment less attractive, which creates a necessity to ensure that there is a good rental income stream generated from letting a property. "While it may not attract the same level of investment, rental yields are a more reliable form of income and the capital growth in properties will be far more positive in the future," Hutchison continued.

According to the FNB Home Loans quarterly report, buy-to-let accounts form 8% of total residential property buying. Reddy said that banks accept only 70% of rental income as an income when a person applies for a second or third bond. The buyer must also provide a lease contract and six months of bank statements proving that the rental income is constant.

The secret lies in the math

Hutchison, however, said that the secret to generating an income from purchasing a buy-to-let property, lies in the math. The bond repayment, transfer costs, insurance, maintenance, monthly levies and taxes, as well as the fee of the letting agent, must all be taken into account when considering the rental income for the property and if that property can sustain that level of rentals into the future.

South African taxation allows investors to write off certain expenses incurred by investment property against the income accumulated from the rental income. These expenses include the interest on the bond repayment (not the percentage of the monthly repayments credited to the capital), municipal levies, rates and taxes, as well as legitimate maintenance, but not upgrades. An investor preferably must also have a safety buffer that can tide over repayments and living costs for three to six months should the need arise.

Buying a second property as a holiday home remains an investment although trends have changed from the coastal holiday house to a house that is more accessible. The holiday home market increased with 2% from 2010 to 2012.

"The same rules apply for qualifying for a second bond for a holiday home as for a buy-to-let property," said Reddy. Hutchison added that banks are not expected to change the financing criteria of second homes in the foreseeable future. "Banks, however, continue to support this market with responsible lending," he concluded.

So, no matter what type of property you plan on purchasing, it still remains an asset that will continue to grow and yield great profit in the long run.