How to choose an investment property

Private Property South Africa
Sarah-Jane Meyer

The PayProp Rental Index for the first quarter of 2019 showed a quarterly year on year rental growth rate of 3.7%, and PayProp’s head of data and analytics, Johette Smuts, says the data shows enough to be cautiously optimistic about continual recovery in the rental market. Property prices have been levelling off for some time now in almost all areas around the country, making this a good time to venture into buy-to-let property investment.

The right properties offer investors the potential for sound returns, and can also involve less risk than other more volatile types of growth investments. Many astute investors have done well by including residential property in their portfolios, especially in the buy-to-let market, which offers income and capital growth.

However, there are no hard and fast rules for buying rental property - for some landlords it makes sense to buy one expensive property whereas many others prefer to diversify, buying several cheaper properties. In addition, rentals and tenant preferences vary enormously from one province to the next. For example, the PayProp Rental Index shows that the average national rent moved up into the R7 500 to R10 000 price brand for the first time in the fourth quarter of 2018. The Western Cape is still the most expensive province in which to rent, with an average rental of R9 030, but about 30% of rents here fall into the R5 000 to R7 500 category. In North West, 54.6% of tenants rent for between R2 500 and R5 000 and this province also has the country’s lowest average rent, at R5 031.

Read more: Market your rental property right

So, what should you look for in buy-to-let property?

  • The first question to answer is whether you are investing for capital growth or cash flow. Properties in certain areas will appreciate in value faster than in other areas, but don’t necessarily provide higher monthly rentals. So, if it’s a monthly income you are looking for you need to consider areas where rentals are reasonably high and tenants are plentiful.

  • If your budget allows, there is the question of whether to invest in a single expensive property, or several cheaper properties. One advantage of spreading the risk over several properties is that you will be less likely to suffer from non-payment of rent. If one tenant defaults, there’s a good chance that your other tenants will continue to meet their obligations.

  • Another advantage of lower-priced properties is that there are generally also more prospective tenants than in the higher bands, so one or more cheaper properties may be a good option, especially for first time landlords.

  • If you intend to build up a property portfolio you might consider buying more than one unit in a new development. According to Just Property’s investment division, the banks consider loan-to-value to be higher on apartments than on building loans for free-standing houses, so many investors are making use of the opportunity to use money from the banks to make money. By spreading your capital into multiple deposits for apartments, you can fast-track your property portfolio growth. For example, instead of paying a R200 000 deposit on one free-standing plot and plan house valued at R1 million, with 80% loan-to-value, you could buy three or more apartments by spreading the R200 000 deposit with a 100% loan to value, even if each apartment costs R1 million.

  • Remember that although property values can fluctuate, people still need a place to live when the economy experiences a downturn, which provides investors with a steady income from rental properties. Always look for areas that will have strong rental demand, even during downturns.

  • Consider buying properties in other parts of the country. You may be able to find a property that is more affordable and provides a much better return on investment. If you choose this option, you will need to find a good estate agent and property manager in that market.

  • Pick a location close to public transit and amenities. Rental properties near universities are ideal as most students will rent for the three or four years they are studying, and their parents will usually provide personal guarantees on the rent.

  • If the property is occupied when you buy it, make sure the tenants are trustworthy. Ask the previous owners for their background checks, credit reports, and rental applications as well as the tenants’ rental payment history.

  • Once you are ready to look for tenants, it’s a good idea to appoint a good letting agency to vet applicants, even if you intend managing the property yourself. Reputable letting agencies have access to information from credit bureaus and rental statistic firms like TPN and PayProp, which enable them to verify applicants’ creditworthiness and reliable payment records.

Read more: Buying a holiday home in Cape Town

Before putting in an offer to purchase

Do your homework - investigate all the possible areas and learn to identify those that are most popular with tenants and that meet your budget.

Ensure your property will produce a steady income stream.

Do the sums – be confident that you could cover monthly bond payments if the property becomes vacant.

Understand the running costs of owning a rental property. As a landlord you will be responsible for maintaining the property in a habitable condition, so you need to put aside funds for maintenance and repairs as well as rates and levies.

Above all, remember that property is a long-term investment, so it’s important to not expect returns from day one.

See more: Investing in buy-to-let student apartments

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