A man and his wife have outgrown their first house and are considering applying for a bond to buy a second home, but he wants to find out more about the ramifications of renting out the existing property.
He says there is a small mortgage on their house, which they are considering keeping with a view to renting it out.
In time, they may even consider building separate flatlets at the back of the property.
He wants to know whether they will be able to secure a bond for their second home and what issues are at stake.
For those who can afford it, keeping your first property and renting it out is a popular way to grow your estate.
See the reader’s question here.
Rental income is often viewed as passive income, with the landlord typically doing very little, while the tenant essentially covers the bond.
Before taking this route the reader should consider whether the rental on the first property is sufficient or close enough to cover the existing bond, as well as any other costs that might arise.
This could include things such as the landlord’s maintenance obligations.
There may also be fees due to an agent, if he uses one in an attempt to alleviate some of his obligations.
If the reader has enough personal funds to cover the expected and any unexpected costs, this could be less of a concern.
Another aspect to consider is the result of a tenant defaulting on the rental and remaining in occupation, compelling the reader to take legal steps to evict and to recover the arrears.
While the eviction may be successful, it is quite possible that the arrears will not be recoverable in its entirety or at all, or it may be recovered in small amounts over an extended period.
He should consider whether they have sufficient funds to cover the bond instalments over this period and costs of any legal fees.
For those aforementioned reasons banks are often loath to take rental income into account as part of your income when deciding whether to grant a further bond.
In accordance with the provisions of the National Credit Act, the joint income and expenditure of the couple will be taken into account.
This will be added to other formulae the bank may apply to determine their affordability and the bank’s risk in granting the new bond.
The value of the new property would be assessed to determine whether there is sufficient value therein to recover the outstanding amount should the couple default on the bond and the property is sold in execution.
The first property, itself, should also be taken into account.
The question is whether it is situated in a desirable area which could allow for decent growth in the value should the couple wish to sell it.
The location may also impact on the desirability to prospective tenants, especially if the building of flatlets at the rear of the property becomes a viable option.
Such units may be attractive to students, so being in an area close to a tertiary education facility may increase the desirability.
It may be useful for the reader to speak to an estate agent to determine the potential for renting the property out, the expected rental income and the viability for future development.
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