BUY TO LET RESIDENTIAL PROPERTY NOW A PARTICULARLY GOOD PROPOSITION

Private Property South Africa
Michael Bauer

Even though we have been through three years in which property lost much of its appeal for many investors, there are still many astute property investors who, right now, see buy-to-let residential property as a good prospect and get good returns - but, says Michael Bauer, general manager of the property management company IHFM, there are others who are investing in property without a proper plan and very often for the wrong reasons.

“I am amazed to find that some property investors still expect to achieve a significant capital growth within a relatively short period of time. This is at the moment simply not possible and might not be possible for a long time.

“I am also surprised to find that others buy into property without a strategy, sometimes simply on the advice of a good friend who apparently has done well in a particular property sector.”

The right tactic in buy-to-let property at the moment, says Bauer, is to buy a property with a good income yield or, better still, to buy a cash flow positive property. Do not, he says, buy for immediate, short-term capital growth – and remember that the best deals are, without doubt, now found in the lower price properties up to R500 000.

Property investment, says Bauer, has always to be seen as long term - five to ten years being the accepted minimum in most investment circles. This may seem a disadvantage but this type of investment is particularly well suited to the upwardly mobile, younger set with good incomes but with limited resources due to their high gearing at this stage of their lives.

“Such people,” says Bauer, “can benefit in a big way from not having to pay fully upfront and make use of the capital lent to them by the banks. If they put the same fairly low deposits into equities they would be unlikely to see the same returns on their investments.”

It must be accepted, adds Bauer, that no investment is ever totally risk free and that buy-to-let properties can be plagued by poor tenants. However, this risk is known and can be quantified and managed by taking out landlord insurance.

“As a matter of fact, although the risk of default tends to be higher in inexpensive properties, the financial risk is lower: if a tenant defaults on R4 000 rent, that can be managed by most landlords. If he defaults on a R35 000 rent that could be disastrous to a limited resourced landlord – but the appointment of a good rental agent can often prevent defaults occurring.”

Overinvesting in property in boom periods has, says Bauer, been the downfall of many: they enter the market too late and buy solely for short-term capital growth. However, if the risks are accepted and the investor knows that he will be able to ride out a few years of low growth and the occasional month or two of receiving no rent, property should very definitely be a significant part of his investment portfolio.

“Right now,” says Bauer, “the rents obtainable in many of the lower priced schemes are extremely high for the simple reason that many people who would like to own are simply unable to do so while the National Credit Act and ever changing lending criteria make it so difficult for them to become home owners. In addition, new stock in the price range up to R500 000 is non-existent and most developers formerly operating in this market have gone bankrupt or have simply stopped supplying new units due financial and market constraints.”

“As property prices have not yet recovered, buy-to-let property is right now a good prospect for those who recognise the limited amount of risk that does surround any property investment of this type.”

Michael Bauer is a regular contributor to www.lessor.co.za. For further information on IHFM’s services go to www.ihfm.co.za or telephone Michael Bauer on 083 255 4442. He can also be emailed on michael@ihfm.co.za.

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