Property investment: A beginner’s guide

To help you make smart choices right from the start, let's explore the essential knowledge you'll need before investing in your first rental property.

Is it a home or an investment?

Investing in a rental property requires a different approach than buying your own home. While buying a home is often emotional, investing in a rental property is purely financial. Think of it this way: your own home is about you; a rental property is about tenants and profit.

With investment properties, the focus shifts to financial considerations, such as potential rental income, return on investment and long-term appreciation. It requires an analytical approach, considering factors such as tenant demographics (age, occupation, location and income), local rental market trends and the property's potential to generate consistent cash flow.

Finding the right location: Unlocking rental demand

Location is key to successful property investment. When evaluating potential areas, consider factors that influence property value, such as proximity to schools, shopping centres and transportation and crime stats, as this is what your tenants will be looking at when they want to rent.

However, be wary of areas with excessive new construction as oversupply can drive down rental prices. Research property sale and rental trends before deciding where to invest or download a free report on your desired suburb from our Home Services property guide.

Understand all the costs involved

Beyond the initial purchase price, several costs are associated with buying and owning an investment property. It's essential to factor these into your budget to ensure you can cover expenses and maintain profitability.

• Deposit: If you're financing the purchase with a home loan, you'll typically need a deposit (usually around 10% of the property value)
• Bond and registration fees: These are costs associated with securing a home loan and registering the property in your name
• Transfer costs: If you're buying a property from a previous owner, you'll need to pay transfer costs to transfer ownership
• Levies: If you're buying a unit in a sectional title complex, you'll be responsible for paying levies to cover the maintenance of common areas
• Building insurance: To ensure you don’t suffer financial losses if a geyser bursts or the property gets damaged  
• Ongoing expenses: Rates and taxes, electricity and water, as well as maintenance and repairs

It may also take time to find a tenant, and it’s likely that it will be a while before your rental income fully covers all expenses. Be prepared to supplement rental income with your own funds for the first few years as your property appreciates.

The benefits of investing in property

• You’re building wealth without putting in a huge upfront investment. You can use a home loan to finance your purchase while only paying a small initial percentage from your pocket.
• Once you have a tenant paying you, banks regard this as additional income, which creates the opportunity to build a property portfolio over time. A good relationship with the bank means future properties can be acquired for a lower deposit amount.
• Property investment appreciates over time, so what you paid for a property initially could’ve increased in value when you decide to sell. Property appreciation also warrants annual rental increases, which could mean more income.

Recognising the risks

While property investment offers potential rewards, it's crucial to be aware of the risks and challenges involved in navigating your role as a landlord. Here are some of what to look out for and how you can mitigate the risk:

• Legislation often protects tenants, making it difficult to evict non-paying occupants. Thorough tenant screening (credit and reference checks) and a contract are essential.  
• Unexpected repairs and general wear and tear can lead to significant expenses. Creating a maintenance budget and setting aside funds for emergencies are crucial.
• Periods of vacancy can result in lost rental income. Effective marketing, competitive rental rates and good tenant relationships can help minimise vacancy periods.
• Economic downturns can impact rental demand and property values. Diversifying your investment portfolio can help mitigate this risk.

The role of a property agent

A managing agent serves as the middleman between you and the tenant, minimising administrative tasks, such as doing background checks on tenants, ensuring there are regular inspections of the property and drawing up contracts, and ensuring tenants abide by the lease agreement.

A rental agent can be particularly helpful if you are a first-time landlord, don’t have time to manage a property yourself or live far away. However, it’s important to note that property agents charge fees for their services, which will impact your overall profitability. Some landlords prefer to manage their properties themselves to save on these costs.

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_{Disclaimer: This article is solely intended for information. It does not constitute financial, tax or investment advice or recommendation. Please speak to a financial advisor or registered financial professional before making any financial decision(s).}

_{Standard Bank, its subsidiaries or holding company, or any subsidiary of the holding company and all of its subsidiaries make no warranties or representations (implied or otherwise) as to the accuracy, completeness or fitness for purpose of the information provided in this article or that it is free from errors or omissions.}