I am sure many of you have heard stories of people who have made fortunes through buying to rent over the years. Although this may be true, new legislation and costs associated with properties make it dangerous to solely rely on buying to rent for retirement.
I have highlighted some points you need to consider before going ahead.
Costs associated with purchasing a property
- Conveyancing fees
Conveyancing fees are payable in order to transfer the property into your name. The conveyancing fees increase as the purchase price of the property increases. Conveyancing fees, deeds office levy and VAT charged at 14 percent can cost approximately R17 000 on a property purchased for R1.5-million.
- Transfer duty
There is no transfer duty for properties that cost less than R600 000. Transfer duty on a property that is purchased for R1.5-million will be R37 000. This is calculated according to the Transfer Duty tax table which can be found on the SARS website.
The eThekwini Municipality recently announced increases of 6.5 percent for rates, sewerage and refuse removal for the 2011/2012 budget. These increases are above the inflation rate and may become a serious concern to all property owners if they continue to increase.
The prime interest rate is currently nine percent. Property buyers need to prevent themselves from being in a situation where they cannot afford the bond repayments as interest rates have increased to 25 percent in the past.
Net rental income received is taxed at your marginal rate of tax (which could be up to 40 percent) and the effective Capital Gains Tax can be up to 10 percent of the total gain once sold. The R1.5-million capital gain exclusion only applies to primary residences.
Estate duty of 20 percent is payable on the property should you pass away.
Lack of liquidity
Many people have had their property on the market for over a year and still do not have a buyer. Situations like these could force the seller to sell the property for substantially less than its true value.
If you do go ahead with buying to rent, getting the right tenant can be more important than getting the right rental price. According to the Prevention of Illegal Eviction and Unlawful Occupation of Land Act of 1999, it can take a minimum of two months (unopposed) to evict a tenant and a minimum of six months (opposed) to evict a tenant with costs.
Do you have sufficient cash flow to pay for the bond whilst removing a non paying tenant?
Another factor to consider is that tenants can look after the property like they rented a car from Avis. This inability of tenants to look after the property can seriously increase the maintenance expenditure necessary and can potentially put you off buying to rent for life!