Owning properties can provide investors with steady rental income or capital appreciation when the property is sold for a profit. However, it is important to measure the return on investment (ROI) to determine the level of profitability of the property.

Before investing in a rental property, there are a number of key factors to take into account explains Craig Hutchison, CEO of Engel & Völkers Southern Africa. “Location and the future of the location is the first and foremost aspect to consider when purchasing an investment property that will result in capital appreciation. The next features to take stock of are fixtures and fittings. Are they durable and will you have high maintenance costs?”

“Thirdly,” says Hutchison, “establish if there is a demand for a particular property. Do your homework on the area and the types of properties that are in demand. It makes more strategic sense to invest in a two-bedroom unit instead of a three-bedroom house, if the demand for the former is greater.”

Lastly, Hutchison recommends that buyers look at a five-year view to invest as a minimum time frame. Ten years is preferable as this will generate a more valuable return on investment, as this should give the best capital appreciation on a well located and maintained property.

Below is an outline of how to calculate ROI:

Cash Purchase

• If an individual purchases a property outright with no bond, the profitability or ROI is calculated as follows:
• If a property costs R1 million and the transfer costs (conveyancing fees, transfer duty, deeds office fee and V.A.T.) are R30 000, the total investment is R1,03 million
• Rent collection every month is R10 000.

In 12 months’ time as an example:

• R120 000 in rental income is earned
• However, there are expenses including maintenance, property taxes, levies and insurance which could total R24 000 per year or R2 000 every month.
• The annual return is R96 000 (R120 000 – R24 000) for the year
• The capital appreciation of the property after selling costs has increased by 3% equaling R30 900 (R1 060 900 – R1 030 000)

To calculate the property’s ROI:

• Divide the annual return (R96 000 + R30 900 = R126 900) by the amount of the total investment (R1, 03 million)
• ROI = R126 900 ÷ R1,03 million = 0.123 or 12.3%
• ROI is 12.3%

If the property is bonded, the profitability is worked out as follows:

• On the same property for R1 million there will be added costs, including conveyancing fees, bond initiation costs, deeds office fee and V.A.T.
• In addition to these costs, buyers should also make provision for additional charges, which can include rates and clearance certificates and prospective taxes amongst others. These costs amount to R30 000 resulting in the total cost being R1,03 million
• A down payment of R230 000 is made and the remaining R800 000 is bonded on a 20-year loan with a fixed interest rate of 10%
• The monthly principal and interest payment would be R7 17
• Add R2 000 per month to cover maintenance, property taxes, levies and insurance, which equals R9 17 in expenses every month
• With a rental income of R10 000 the owner would make R279.83 each month (rent minus bond repayment)

One year later:

• The investor earns R120 000 in total rental income for the year at R10 000 per month.
• The annual return is R3,357.96 (R279.83 x 12 months)
• The capital appreciation of the property after selling costs has increased by 3%  R30 900 (1 060 900 – 1 030 000)

To calculate the property’s ROI:

• Divide the annual return by the original out-of-pocket expenses (the down payment of R230 000) to determine the ROI.
• ROI: (R3,357.96 + R30 900) ÷ R230 000 = 0.15
• The ROI is 15%

Things to Consider

As demonstrated in the examples above, the ROI for a rental property is different depending on whether the property is financed via a home loan or paid for in cash. It is also important to bear in mind certain variables such as if the property is vacant and there is no rental income for a number of months or maintenance costs are higher than anticipated.

An excellent credit score is one of the most priceless assets a potential home buyer can have. This tool has the power to secure favorable mortgage and refinancing rate, influencing everything from the size of the loan repayment to the interest rate on the home loan.

It is advisable that potential home buyers check their credit score before even starting to look for homes or applying for a home loan, as the banks will look into your financial history and the application will be declined if you have a low credit score. The important thing is that your accounts are up to date and that you have the ability to afford the bond.

South Africans are entitled to a free copy of their credit record every year. Many South Africans are surprisingly unaware of the importance of a good credit profile, many do not know what a credit profile even is, and even if they do, they seldom check their own personal credit profile. Today many potential employers look at credit profile reports as a way to judge a person’s character and level of responsibility.

Your credit score is typically a number from 0 to 999 and is calculated by using all the details on your credit profile. It reflects a ‘score’ summary of all your financial decisions, it is often used by lenders, such as home loan and personal loan companies, to make accurate decisions on whether they should lend to you or not.

We take a look at what the experts have to say about credit scores and what should and shouldn’t be done.

How does a credit score work?

The higher your score the better your credit health will be, which will be an advantage when applying for a home loan, making it easier for you to borrow money at lower interest rates. The lower the score, the higher the risk which then influences the outcome of the credit application.

By managing your credit profile effectively, you can ensure your image and profile is viewed favorably by lenders or other organizations. A bad credit score would mean the exact opposite of this and result in almost no financial institution willing to offer you a home loan.

Credit score guideline:

How do they calculate your credit score?

Your credit score is calculated by a credit bureau based on your credit report. They consider how you pay your bills, how much debt you have and more importantly, how all of that compares to other credit active consumers. Each bureau has a different way of calculating your score and take into account different forms of information, including information their organization already holds on you, or your employment circumstances.

Your credit score is only one part of your credit report although it is almost the single most important item on your credit report; the full report gives you some handy information. Your credit report is a combined summary of your financial background with an overview of your credit score, financial accounts, profile, and rating.

What influences your credit score?

As you start transacting with various banks, retailers and other financial institutions like lenders, you start building a financial history. Your credit history will be determined by the amount of money you have borrowed in your life and how much of it you have diligently paid back on time.

Credit score is affected by the following:

• Missing payments or not paying on time, even if you make double payment the following month the score will affect your credit history. While adverse legal information is cleared as soon as the account is settled, the negative repayment history however remains for a couple years.
• Too much debt – how much you owe and how much of your available credit you’re using – it is advisable to try to keep the use of your current credit facilities to less than 35% of your limit.
• Negative information like a court judgment taken against a consumer’s name (commonly known as blacklisting).
• Length of credit history.
• Account application and enquiry activity – within a short period of time, how many account applications the consumer submitted and how many new accounts you opened.

My credit score is lower than I expected. Why is this?

 Fincheck provide us with some reasons:

• A credit history of fewer than 6 years, which is the time frame used to calculate your total credit score.
• Missed or late payments over the last 6 years.
• Holding very few credit accounts means there will be less credit history available on your profile.
• Court judgments or record of insolvency.
• Having a lot of unused credit available could lead to a large balance of debt if you decided to use it all at once.
• Balances on your accounts that are very close to the credit limit indicate that you rely on credit to get through each month.

Why improve your credit score?
Credit providers measure their risk in taking you on as a client before they approve or decline your application for credit, so improving your credit score increases the chances of being granted credit on favorable terms.

How to improve your credit score

• Regularly checking your credit report to confirm all the details are correct.
• Making sure you make payments on any outstanding credit accounts on the due date. (Should you have difficulty in making your payments, you should contact your credit provider to agree on a payment plan, or to reduce your regular payments to an amount that you can afford to pay).
• Consider setting up regular automated payments rather than doing manual payments.
• If you have too many old, unused credit accounts, consider closing them.
• If you are almost reaching your credit limit on one or more accounts, try and reduce your balance. Outstanding balances mean you have a lot of outstanding debt in your name.

How long does it take to improve your credit score?

It depends on how long it will take to improve areas that need attention and maintain them, real improvement will start showing after three months of consistency, as you show progress your credit score will automatically get updated.

If you have had a couple bad experiences with your credit health, it is helpful to know that, credit inquiries stay on your credit report for up to two years, whereas more serious activities that incur namely late payments, lawsuits, bankruptcy and tax liens will stay on your credit record for up to ten years.

How to build up a credit score if you don’t have debt

Unfortunately you won’t have a credit score if you don’t have any debt because your credit score is calculated and based on your credit habits. This doesn’t mean your financial health is bad, there’s just simply not enough data to give you a credit score. This can be bad news if you’re looking for a home loan though, so your first steps will be to apply for financial products where you can start building a credit record.

These can include:

• Credit card
• Vehicle finance
• Phone contract
• Clothing accounts

Consequences of a bad credit score

• Not paying your account on time or at all which can result in you not getting further or desired credit when needed.
• Lenders will see you as a high risk meaning that should they decide to take on that risk, they will charge high interest rates compared to someone with a good credit score.
• Depending on what industry you are in – some industries such as banking – check a potential employee’s credit report and score. They consider a bad credit score as someone who is not trustworthy to work in a banking environment.

Consequences of not checking one’s credit score

It is advisable for a consumer to check their credit report every 3 to 6 months. Statistics show that only 3% of the 24 million credit active South Africans have seen and understood their credit report. This comes as a threat of potential identity theft where someone can use a consumer’s ID to clone their profile and open lines of credit. A credit report contains so much personal information including addresses, phone numbers and employment that the leak of such information poses a big risk of fraud to the individual.

How a credit score affects you when applying for a home loan

When it comes to taking out forms of credit like a home loan, your credit score plays a vital role in your eligibility for a home loan, however it’s not the only factor to affect your application, your debt-to-income ratio will also play a big role.

What score do you need to qualify for a home loan?

There’s no specific score which will qualify you, if you follow the step to build a healthy credit score and maintain a healthy debt-to-income ratio, lenders will see you as eligible for things like home loans. Most lenders prefer to lend to an individual whose debt is less than 36% of their gross income. This, along with healthy credit habits that keep your score in the ranges above 650 will put you in a good position to secure a home loan.

If you are declined for a home loan, what should you do and when do you apply again?

It’s important to know that if you apply for any hard forms of credit like a personal loan, credit card or home loan, you will get a hard inquiry against your credit report, too many of these are a red flag to lenders.

If you have had an unsuccessful home loan application, take a step back and start improving your credit health. There’s no fixed time frame for this, it will take as long as you take to form healthier credit habits, pay back debt and wait for that very happy green indicator on your credit report.

How can you get your credit score?

• Fincheck aims to help people make better financial decisions. They have spent a lot of time and effort in building a tool to help you do all of the above. You can sign up for the MyFincheck Credit Score Tool and get your FREE score directly.
• For more information about your credit score and assistance in improving it, you can download the Moneyac app available on the Google Play Store alternatively go to the website www.moneyac.club where you can access your credit report and experts that can help with anything related to financial health.
• TransUnion – 086 148 2482
• Experian – 086 110 5665
• Xpert Decision Systems (XDS) – 086 112 7334
• Compuscan – 086 151 4131

It is never too late to begin working towards an improved credit profile. After all, it could be the difference between you being able to purchase your dream house, finance a vehicle, pay emergency medical expenses or further your studies one day.

Real Estate Agent:

A real estate agent, also referred to as a property specialist, is a licensed professional who acts as an intermediary between sellers and buyers of real estate / property and attempts to match the parties up in order to conclude a sale.

“Deed” :

Refers to every deed or document which the registrar of deeds is obliged to execute or register in terms of section 3 of the Act, and includes any document submitted in support of or which is required to accompany a deed or document referred to in section 3.

Transferring Attorney:

A transferring attorney, also referred to as the conveyancer, is appointed by the seller. They effect the transfer of immovable properties from sellers to buyers. The agent may advise the seller on a transferring attorney , but the prerogative remains with the seller to nominate the conveyancer.

Registering (or Bond) Attorney:

The Bond attorney (conveyancer ) gets appointed by the bank who grants the loan to the purchaser. They will advise the transferring attorney of the amount available for guarantees and requests . Once all documentation is in place, the conveyancer will register the bond against the land serving as security under the bond.

Cancellation Attorneys:

The conveyancer appointed by the Bank represent the bank by cancelling the seller’s bonds and secures any amounts still owing in the form of guarantees or undertakings.