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SIMON BROWN: I’m chatting with Alan Rubin, COO of ooba Home Loans. Alan, I appreciate the time today. Buy-to-let [has been] bouncing back very strongly, particularly in the Western Cape, which is now ahead of pre-pandemic levels.
ALAN RUBIN: Yes, Simon. Thank you for the opportunity. The Western Cape is certainly quite different from the rest of South Africa. When one looks at the percentage of buy-to-lets in the overall ooba home loan space, it’s roughly 9% of applications across the board. In the Western Cape it sits more at the 22% figure. So there is significantly higher buy-to-let within the Western Cape than in any of the other regions.
SIMON BROWN: I suppose that makes sense. we’ve got semigration and the like. I was down there last month and the one thing you notice is that foreign tourists are back – and that’s [at] Airbnbs and all the rest as well.
ALAN RUBIN: Yes. Certainly if you were to look before the pandemic there were significant amounts of tourists – the boom and so on. Although I’m not sure that in the Western Cape we are completely back to the levels of tourists that we saw before Covid, we are certainly getting closer.
There was a period of time, I think, during the Covid patch when clearly there were no tourists and rentals in the Western Cape and everywhere would’ve fallen quite dramatically. That would’ve matched the interest-rate drops at the time. And now we’re seeing the reverse of that cycle where the tourists are back, interest rates are higher, rentals are higher, and all those kinds of factors are driving the attractiveness of properties as buy-to-let.
SIMON BROWN: I take that, because the immediate thought is I look at the prime rate which is sitting at 2009 levels. But it’s the rentals that you can get. That’s what matters.
With buy-to-let one of the first things to do is haul out that Excel spreadsheet and do a realistic number calculation.
ALAN RUBIN: Yes. You’ve got to do that number calculation, firstly looking at your own income and expenses and what your aspirations are, [and] what your basket of investments is. So there’s a whole piece there that you need to do. And then exactly what you’re saying – you also need to take that spreadsheet out and have a look and say, if I take out a home loan, what’s the amount of interest I’m going to have to pay on a monthly basis and, at the most basic level, what’s the rental I’m going to get in, and is that going to service the interest?
Then, looking further at the expenses that come with it, you’re going to have levies, you’re going to have rates, all sorts of bits and pieces. You’ve got to do your sums very, very carefully when you go into this investment. You’ve got to also do a little bit of rainy-day preparation because you’re not always going to have a tenant.
SIMON BROWN: Yes, or something breaks or something like that [happens]. A deposit when buying a house is always a good idea. Is a larger deposit better for buy-to-let? I’m thinking of that, just because it reduces your monthly cost and gets you to break-even quicker.
ALAN RUBIN: Yes. The first point, if you’ve got the deposit, is effectively the loan-to-value ratios. So when the banks look at the security that the property you’re buying is going to offer them, they look and say – let’s say that you were paying a million rand – if you put down a 10% deposit, effectively they’ve got a million-rand protection for the R900 000 loan. As you increase that deposit, you make the loan more attractive to the lender; that’s what we call lower loan-to-value. If you are borrowing less relative to the purchase price, in other words you’ve got a bigger deposit, then you’re going to get a more favourable interest rate. So that’s definitely a factor for putting in the deposit.
And when you’re applying for that home loan, if you’ve got a deposit, when the banks do the affordability calculation and ask if this person can afford to meet the bond repayment, the bond repayment is going to be lower because you’ve got the deposit, which makes it more attractive. That’s on the borrowing side.
Then the other side is looking at it as your business and saying effectively you are gearing a business; you’re borrowing a certain amount in order to buy the asset and earn the rental income. What you say, if you look at the amount that you’re borrowing, is that the interest cost is going to [have to] match that. The less you borrow, the more likely your rental is to meet the full interest expense. So there’s a balancing act there.
You want to do your sums very, very carefully to make sure that you can beat that bond repayment and that you balance it out.
SIMON BROWN: And, to the point, do the sums carefully.
A last point. You mentioned it is a business, and it is a business. What it isn’t is a sort of passive investment. This is something in which you are well better served if you are involved in the process. To some degree you’re going to have to be [involved], but the more involved you are and the more active you are, probably the better the investment in the business works.
ALAN RUBIN: Again, I absolutely agree with you. When it comes to running this, it is a business. So simple things – if you’re going to put someone in your property, clearly you should be credit checking them and making sure that you’ve done your due diligence on your tenant because we all know the challenges if you have a tenant that’s not paying the rental and you want to try to evict the tenant. So those kinds of things you’ve got to stay on top of.
But you also need to stay on top of the property itself, and make sure that, if it has an air-conditioning unit, it’s serviced. Make sure that you’ve checked that the tenant has paid you the rental, and that the tenant knows that you’re on top of it if they’ve missed a payment. Clearly you can employ the services of a real estate administration company or, if you’re running it as an Airbnb, some other kind of company that would put in the tenants and do the linen for you. But if you do have the time to focus on it and see it as a business, and do that management and administration yourself, you’re effectively increasing your earnings from the property because you’re paying yourself a salary to perform those roles.
SIMON BROWN: That’s a great point. You could pay someone else, but you’re better off paying yourself. We’ll leave it there.
Alan Rubin, COO of ooba Home Loans, I appreciate the time today.
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