High unemployment figures, ongoing inflation, rising interest rates and uncertainty leading up to the general election in 2024 have all contributed to a deteriorating South African economy. On the plus side, these factors have also resulted in the home rental market improving to pre-covid levels.
“The cost of buying and owning a home has become prohibitive for many South Africans, which has had the effect of strengthening the rental market. For existing homeowners and investors alike, rentals can be a source of additional income,” says Andrea Tucker, director of online bond aggregator MortgageMe.
According to the PayProp Annual Market Report for 2022, the average rent increased nationally by 3.4% year on year from the fourth quarter of 2021 to the fourth quarter of 2022. This is above the 3.2% recorded in the first quarter of 2020, meaning rental growth has now recovered to pre-pandemic levels.
Opportunities
According to TPN’s rental monitor for May 2023, around 54% of South Africans across all age groups say they are renting because they cannot afford to buy.
Tucker says that turning what may seem like an unsellable liability into an income-generating asset is an attractive option for existing homeowners. In addition, a strong buyers’ market can provide new prospective buyers with good opportunities in the buy-to-rent property market.
“If you are struggling to sell and aren’t obliged to – or don’t want to – sell your property while prices are low like they are in many areas at the moment, letting your property instead can provide an income stream to cover bond repayments - and possibly more if you are fortunate,” says Tucker.
For investors with the necessary financial muscle, this is a golden opportunity to enter the buy-to-let market, with prospects of solid returns.
Attractions
Although there is strong demand for rentals, rental stock is still plentiful, so landlords must work hard to attract and retain reliable tenants.
Before becoming a landlord, you should research the market in your area and establish who your prospective tenants may be and what they look for in a rental property.
Next, make a list of the desirable aspects of your property. For example:
- Is it close to a business district that employs a range of salaried people?
- Does it have a garage or off-street parking?
- If it’s a family home, is the property pet friendly?
- Is the yard safe and secure for children and animals?
- Are there schools, shops and other amenities nearby?
- Does it have alternative electricity sources?
“Loadshedding has become a fact of life. If you can afford to invest in alternative energy sources for the property, it will stand out from other homes that have no inverter or solar power,” says Tucker.
“The investment in something as simple as a gas hob is likely to pay itself off with the calibre of tenant you’re attracting. A wired-in inverter connected to solar panels is an added attraction, and it might be worth considering the rental options for these.
“Many people are now working from home – at least part of the time – so it could also be worthwhile creating suitable spaces for use as a home office. Converting an outbuilding or a garage into a work-from-home office with reliable WiFi is a good option."
Getting a property ready for rental can be costly, and any expenditure should be factored into your income and outgoings balance sheet. It's important to research your options thoroughly, and if you have the necessary skills, you could do some of the work yourself.
Investing
Buying to let can be lucrative, but it is not without possible pitfalls.
Although South Africa has the smallest differential between rent and bond costs in the world - Renting vs Buying | Compare the Market - there are nonetheless a number of additional costs to consider when buying a property.
Tucker says the administration costs of buying a property can amount to around 8% of the registered bond amount. Fluctuating interest rates make bond repayments variable unless you can negotiate a fixed rate from your bank. However, this may cost you more over your bond term, so you need to evaluate both options carefully.
There are also pros and cons to buying to let. Landlords are responsible for the upkeep and maintenance of rental properties. Although you should have building insurance to help with repairing or replacing items such as geysers and the roof, you still need to factor in the monthly premiums to keep you covered.
Property rates and taxes are the landlord's responsibility, whereas tenants are generally expected to cover their own water and electricity costs.
“Whether you are buying to let or considering letting your existing home to add an income stream, you need to carefully weigh up your finances and circumstances as well as those of the prevailing market and area before making a final decision," says Tucker.
“If you can afford to buy, keep in mind that property is a long-term investment that will pay dividends in the long run.”
Writer: Sarah-Jane Meyer