Before you rush off to buy that second property there are a number of calculations to be made.

Firstly, you need to evaluate your current financial situation. Purchasing a second home works best when the bond on your existing property is paid off. The payments that were earmarked for this purpose can now be redirected. If you are still paying off your bond or have other debt commitments, paying these off first may be a better use of your surplus capital.

For example, if you have a spare R40 000 in your coffers, you could afford to purchase a second home for R200 000 (R20 000 for the deposit and 20 000 for transfer fees and costs). The bond on R180 000 over 20 years (at an interest rate of 13%) would cost R2 108.00. Over 10 years the payment would be R2 687.59. It would be prudent to finance the property over 10 years because there will be a substantial reduction in interest charges. (you would save R183 609). If you invested in a two-bedroomed townhouse you could probably ask for R3 000 per month in rent. This would easily cover the new bond payment.

Assuming the figures above, on a 10 year bond you would have a surplus of R313 per month. This would be consumed by levies (if in a cluster or town house development) and maintenance costs. In fact your running costs are likely to be in the region of R500 to R800 per month. This means that you would be subsidising the property by at least R300 per month. You then have to take into account the tax paid on the income received. You will be taxed at your marginal rate of tax. To offset some of the tax you could consider buying the home in a Pty (LTD) or a CC therefore allowing maintenance costs to de deducted as an expense.

If all goes well and you are fortunate enough to have good tenants that look after the property, the investment can provide you with a steady income in retirement. In addition, the capital value of the property will have increased over time. However, bear in mind that you will be liable for Capital Gains Tax when you sell the property.

Important points to consider:

  • A critical element to consider when buying an investment property is the location. If the area is starting to decay, the rents you can command may drop thus leaving a large bond shortfall and possible devaluation of the capital value. Make sure that there are no planned developments like highways or office blocks that may reduce the desirability of the property.

  • Check out your potential tenants thoroughly, follow up on all references and confirm that they are employed. If they haggle over the deposit (one to two months rent) take it as a warning sign that they may be financially strapped.

  • Also make sure that a lawyer draws up the rental agreement. Alternatively ask your local estate agent for a copy of theirs, so that you can see what needs to be covered.

  • If for some reason the tenant leaves without notice or the home needs to be empty for renovation, make sure that you can afford to make the bond payments. It is a good idea to have three months rent in a short-term savings account to cover unforeseen emergencies.

    Discuss the topic of insurance with your tenants. They should take out renters' insurance to protect their belongings in the event of a theft, flood or fire. Most homeowner policies will not cover the renter’s belongings.

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