The simplest definition of ‘buy-to-let' is that it’s the practice of buying a property that is rented out to tenants. It’s been proven, over decades, to be a successful investment strategy that helps to combat inflation and build wealth, among other beneficial returns. This is understood among those who already have at least a couple of properties in a portfolio.
But what if your property investment journey has stagnated, or you find yourself unable to progress financially beyond the two or more buy-to-let properties in your portfolio? Absa has the solution with its Future Rental Income facility. Miguel Martins, Portfolio Manager: Investors, Absa Home Loans, explains how the facility works and who qualifies.
“Future Rental Income is ideal for the investor who has hit an ‘affordability ceiling’, and/or possibly where credit is telling them to sell an existing property to finance the next one,” says Martins. “Future Rental Income, in many cases, will enable such an investor to purchase their next investment property without having to necessarily sell an existing one. However, it is strictly only available to those who have a minimum of two properties, one of which may be their own live-in property.”
This Absa feature is ideal for buy-to-let investors wanting to build a rental portfolio and "who may have hit a ceiling in their affordability and need a little bit extra to overcome that hurdle”, says Martins. Introduced by Absa to the South African market in 2018, the facility is strategically named because it considers the investor’s ‘future rental income’ from buy to let properties, including it in the qualification of ‘evidence of income’. This has the potential to elevate an investor’s ability to secure finance for the purchase of a third or more properties.
It also displays Absa’s confidence in the residential property market and buy-to-let purchasers. “Those applying also don’t necessarily need to be individual property owners either, as the facility is also open to trusts and companies that own properties,” says Martins.
Understanding that property acquisition depends on investors’ affordability and where they find opportunities, Martins confirms that the most popular average value of property purchases of this nature is R1.1-million. However, we are seeing a lot of interest and activity around both the R750 000 and R1.5-million value ranges.
“I emphasise that investors’ individual strategies vary but, in principle, the guideline in wealth creation through property acquisition is to achieve a minimum of around 15 percent return on the cash invested in purchasing or renovating a property.” Martins provides an example of such a strategy: “If an investor puts R60 000 into transfer fees, and R40 000 into the repair of a house, the aim should be to at least realise R15 000 net rental profit per annum, after taking the home loan repayment, levies and other such costs into account. That 15 percent is generally, as said, the ideal minimum, but there are some savvy investors achieving far more than 15% return.”
There are also several tax implications when it comes to property investing, many of which are beneficial, but, says Martins, it is always advised to engage with a tax accountant who can provide guidance on these matters. “However, there are no tax implications directly associated with the utilisation of Future Rental Income as this facility benefits the affordability in the home loan application.”
The application itself is relatively painless. As is usual, the applicant completes a home loan application form, which always includes a section requiring information about the applicant’s various incomes, such as salary, rental income, investment returns etc. Future Rental Income is included under ‘Other’ income, and investors are asked to specify what that is likely to be. This is usually based on what similar properties in the area are being rented for, the condition of the property and features that make it desirable. This future rental income estimate is checked by the Absa credit team that assesses the home loan application.
The Future Rental Income application is available online via Absa’s website or through Absa’s property finance specialists. In addition, Absa origination partners are also well aware of the service and can assist applicants.
“A general rule of thumb, established over decades, is that it is never a bad time to buy an investment property, provided the correct skills are engaged, and the investor has the right knowledge to do so. There are an extraordinary number of online facilities that serve to educate and inform about the potential wealth that can be created through property acquisition. However, what has to be borne in mind is that market shifts can affect the property value, so while the number of opportunities may increase, so too do the risks,” says Martins.