Investor Homes: Buyers' Risks and Rewards

2 Nov 2018

So, you are looking to purchase an investment home. Or, perhaps you are looking to upgrade to a larger home without selling your current property. Whatever the circumstance that has brought you to the place of purchasing a property for investment purposes, there are risks and rewards involved. This report will assist you in understanding the risk / reward matrix and help you on your way to passive income.

Let's look at the risks and rewards of property investment.

LANDLORD OBLIGATIONS

Reward Someone else pays your bond on your leased property. Great! So all I do is to rent out my new property and the tenant will pay for everything? Not quite.

Risks As a landlord, you will have an obligation to ensure that the property is maintained. This maintenance can take the shape of simple repairs or could be as expensive as replacing a burst geyser or fixing damp caused by a leaky roof.

While the number of tenants in South Africa is unusually high, it is littered with people who abuse both their landlords and the physical property alike. This is often caused by an innate lack of respect. Getting rid of a bad tenant can be extremely difficult, especially if you do not have the correct paperwork in place. To reduce this risk, make sure you seek legal counsel when drawing up the lease agreement. Also ensure to take a deposit on the rental that can be used to pay for damages that the tenant may cause.

Tenants often have difficult months and will sometimes miss a payment or two. There are two ways you can mitigate this risk and we suggest you do both: put a clause in the lease agreement that handles a lack of payment and take two month's deposit up front.

DEFINE PROFIT!

Reward After a few years, I can sell the property and all the profit will be mine. This is mostly true (barring a prenuptial agreement or some other such document), once Capital Gain's Tax has been paid.

Risk In South Africa, SARS takes their cut in the form of Capital Gains Tax. There are a number of ways to ensure that, while still complying fully with the law, you pay only the minimal amount of tax. Talk to your real estate agent about purchase options.

LEGACY

Reward A property investment will survive you. In essence, you can bequeath the property to the next generation, leaving it as part of your legacy to them.

Risk Your property may not go to those you want it to! The risk here can be lowered by talking to your attorney. Ensure that your will is set out with clear instructions that leave no room for misinterpretation for the disposal of your additional investment properties.

PERSONAL GAIN

Rewards The stability created by owning an investment property often provides a sense of comfort to owners.

Let's be honest here. Owning a house is, in itself, a great accomplishment. Owning 2 or 3 houses is even more so. There are very few risks associated with ego!

“An investment in knowledge always pays the best interest.” - Benjamin Franklin

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