Buying a property to rent out is often seen as one of the safest ways to build wealth.
But before signing an offer to purchase, Certified Financial Planner Warren Ingram says prospective landlords should forget what they’ve heard from family, friends and self-proclaimed property experts and focus on one thing instead: the numbers.
Speaking on 702/CapeTalk’s The Money Show, Ingram said too many people approach buy-to-let investments with assumptions rather than calculations. The decision to invest should not start with what you believe, argued Ingram, but with what the numbers tell you.
“So I would say that if you’re having this kind of a conversation with yourself or with a partner… don’t start on the basis that I know property is a great investment, or alternatively, I know it’s a terrible investment.”
Instead, he said, prospective investors should treat property like any other investment.
“It’s called investing. It must be about numbers.”
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The rent often doesn’t cover the costs
One of the biggest misconceptions, according to Ingram, is that a tenant will simply pay the bond every month.
He said that is rarely how the numbers work.
“The truth is that you are going to buy a property in most instances where the bond is going to be bigger than the rent that you can earn.”
He said buyers also need to remember that the bond is only one part of the monthly cost of owning a rental property.
Rates, levies, insurance and ongoing maintenance all need to be factored into the equation from day one.
“I would suggest as well that you’re setting aside money every single month from the very first day for when the place needs to be repainted, all the carpets need to be redone.”
Using the example of a R1.2 million apartment, Ingram said investors could find themselves paying a bond of around R12,000 a month, another few thousand rand in ownership costs, while collecting rent of roughly R8,500.
“So, you’re paying out R12,000 on a mortgage, you’re paying another, let’s say R4,000 on all the other costs that you have to pay, and you’re getting R8,000 or R8,500.
“You’re going backwards pretty quickly.”
Being a landlord comes with risks
Even if the numbers appear workable, Ingram said landlords need to prepare for periods when a property stands empty.
“The first big risk… is that your flat has got no one in it for a while. So, you’ve got the bond, and you’ve got no money coming in.”
Even worse, he said, is a tenant who stops paying rent.
“You get a tenant that comes in for three months and then stops paying.”
He noted that landlords must follow the legal eviction process, which can take months while they continue paying the bond, municipal charges and legal costs.
Tenant turnover also has a financial impact.
“It doesn’t mean that that person’s going to stay there for the next ten years.”
He said even a one-month vacancy each year can significantly reduce annual rental income.
Don’t put all your eggs in one basket
Ingram also warned about concentration risk: committing a large amount of money, and often borrowed money, to a single property.
“So, the concentration risk is simply now you’re taking all the eggs you have, and you’re borrowing money, and then you’re putting them in this basket.”
He argued that many investors would question putting that amount of money into a single listed company, yet often think nothing of doing the equivalent with one property in one suburb.
SARS also gets a share
Rental income is taxable, something Ingram said catches many first-time landlords by surprise.
“Rent is definitely taxable. It’s exactly the same as if you were earning interest.”
He noted that legitimate expenses, including maintenance costs and the interest portion of a home loan, may be deductible.
However, he warned that owners should also think ahead to when they eventually sell.
Unlike a primary residence, rental properties do not enjoy the same capital gains tax relief.
“When you sell that property… you’re going to have to pay capital gains tax on the whole value of the entire profit.”
The calculation every buyer should know
Ingram said there are situations where rental property can make financial sense.
But he believes buyers should make that decision only after calculating the property’s rental yield.
He said investors should calculate the annual rental income after costs as a percentage of the property’s value.
“If that rent after costs is at least better than inflation and it’s escalating, it’s growing every year, you might be doing okay.”
He added that an after-cost yield of around 8% or 9% would make him much more comfortable with an investment.
“But if it’s 1% or it’s negative… then I’m thinking very carefully before I make that decision.”
Ultimately, Ingram said there is no universal answer to whether buying a rental property is a good investment.
“There are times when it does actually make sense,” he said.
But for anyone considering becoming a landlord, he believes the decision should be driven by careful calculations rather than emotion or conventional wisdom.