Please note this article is for information purposes only and as such is not professional advice. Ultimately, facts differ from case to case and one should not rely on general advice when considering a specific scenario and appropriate professionals need to be consulted before deciding on any course of action.
In today’s economy, it makes sense to consider options to generate an additional income, while increasing the value of the home or possibly funding a place for parents or children to stay in the future, which is increasingly becoming a trend possibly due to financial necessity, rather than choice, in some instances.
But where to start?
There are so many people offering advice but what advice can you trust?
So often when people ask for advice on costs, possible rental income or yields; one may find advice being freely offered, which in reality adds little if any value.
If you are investigating this route, realize from the outset that you will need expert advice and there may be costs to this, depending on the experience level and nature of the profession involved.
So where do you start?
In my experience, getting in a professional real estate professional is a good place to start. A professional estate agent is an essential member of your team, after all, many aspects of the venture revolve around property.
At this stage we are talking in broad broad strokes, what are the options, will it add value, will it diminish the value of what already there, will it impact privacy, and enjoyment of the property as it stands.
At this point, various options may present themselves. These could be as different as repurposing an already built part of the existing structure, adding on to the existing home, or building a free-standing structure. This all comes with practical implications.
ATTORNEY / CONVEYANCER
At this stage, you will need some legal advice. Some aspects that would need attention are the title conditions, restrictions, and servitudes over the property. One also will need to look at the legality of the building based on the ownership structure applications such as whether the property is a sectional title unit, freehold complex, or whether its freehold.
These factors will affect what you can do and what you cannot. Once one knows that it’s legal to proceed one will need to look at local authority laws and regulations. These come in the form of planning rules, what activities can be performed on the property based on zoning and the applicable consents which are in place, or not.
DRAUGHTSMAN / ARCHITECT
If after all this the option/s are still viable we can proceed to the next phase, which is getting in a suitably qualified and experienced draughtsman and/or architect. Price is important but more important is checking references and making sure that they have successfully undertaken similar projects and their client’s experience.
BUILDER / PLUMBER / ELECTRICIAN
Once one has a plan, you can proceed to get a quote on what it will cost to build. Remember that you must factor in all the costs, building, building materials, plumbing, electrical, and have the allocation for incidentals plan approval fees and aspects like decor, furnishing, etc.
At this stage the costs incurred are relatively low and its important at this stage once you have a plan and have costed out the project to involve your agent again to give advice based on the plan and what will be included in the rental (like water, electricity, wi-fi, use of the pool etc) what a fair rental will be and what associated costs can be recovered from the tenant; so as to determine the net income from renting the property out.
FINANCIAL ADVISOR / TAX ADVISOR
It is also advisable to also look at the effect of taxes on the venture. Although many owners do not declare rental income and simply pocket the funds it must be noted that SARS is desperate to collect and this pool of income is very much in their sites. That being said maybe there may be positive aspects to running above board. The costs incurred by the tenant will become tax deductible, as will a pro rata share of the rates etc based on the square meters used for letting. There also mi9ght be the option of recovering some of the financial costs incurred to build the rental unit (i.e. interest and financial fees sadly not the capital side). At this point, I would suggest a good tax advisor to assist you to maximize your return and make sure you get the most out of the venture.
It is also a worthwhile exercise to consider the opportunity costs involved since committing funds to this project will mean they cannot be invested elsewhere.
If you will need bond finance to finance the project it may be necessary to consult a bond originator. This will mean that you will be able to get the best deal possible on a bond and also get advice on the best repayment options to save the most money. If you need to increase your bond or if you need a bond there will be bond registration and bond initiation fees applicable, which need to be worked into your calculations.
In some cases, one may need to factor in the costs of increased rates due to the increased value of the property because of the build, possibly higher rates due to a second kitchen, increase service costs, increased water usage (especially during water restriction periods).
At this stage, the property professional will look at factors like the capital value add of having the build being done, the effect on the owner’s enjoyment of the property, etc
Only at this stage, can any real advice be given on the viability of the proposed project and can one make an informed decision.
Clinton Begley is a professional estate agent and property consultant, with over 17 years experience, who practices with OPEN REALTY, in Port Elizabeth, Nelson Mandala Bay in South Africa. He holds a legal degree (B.Proc), as well as the CEA, PPRE, and MPRE professional designations. In addition to practicing as a real estate broker, Clinton is an admitted attorney, notary, and conveyancer (in good standing) on the roll of non-practicing legal practitioners since 2014 (having practiced for 14 years). He is also enjoy reading, writing, and photography.