The last few years have been particularly trying for the rental property market, but the latest TPN data shows a clear sign of hope as tenant demand continues to rise.
With levels closer to those experienced pre-COVID-19 pandemic, Grant Smee, Managing Director of Only Realty and property entrepreneur believes that the rental property market could experience further growth due to ongoing repo and municipal rate increases – making home ownership a less attractive prospect.
Smee believes that the announcement of three repo rate increases in quick succession and ongoing municipal rate increases are a primary contributors for heightened rental property demand and reduced property values. “This results in more buy-to-let investments rather than buy-to-live purchases.”
Tenant demand explored
“The TPN data released earlier this year showed strong signs of tenant demand in Gauteng (57.21%), Western Cape (63.01%) and Eastern Cape (62.7%) in particular,” explains Smee.
“For a boom to take place, demand needs to outweigh supply and this is particularly prevalent in Eastern Cape and Western Cape where supply sits at 53.17% and 59.16% respectively.”
TPN’s Market Strength Index is currently at 52.9 – indicating that equilibrium between demand and supply (50 points) will soon be reached.
He adds: “From our own data, we see strong demand in Mpumalanga – currently on an upward trajectory. While the latest data released by ooba Group indicates strong buying demand in the Free State and North West – upcoming contenders in the property market as more people move to outlying inland areas.”
Smee believes that a key contributor for this demand centres around semigration. “Many people are opting to rent rather than buy out-right when semigrating to a new region. This gives them the opportunity to better explore the option prior to committing.”
What does ‘buy-to-let’ mean?
“As the term indicates, buy-to-let refers to a homebuyer who is purchasing a home as an investment property. Here, the buyer has no intention of living in the home (or a part of the home), and will be renting the property out to a vetted tenant.”
The homebuyer views the property as an income stream and uses the rental amount received to cover monthly bills. “A lot of buyers in this category are looking for properties around R1.3 million – the most popular price bracket in South Africa. It gives them the opportunity to find a tenant willing to pay what it costs to cover the bond,” says Smee.
He cautions potential homebuyers to do their sums carefully before embarking on this journey. “Buy-to-let success is only possible if your bond repayments are lower than the rental amounts received. In a case where you are making a loss at the current interest rate, keep in mind that the interest rates will continue to rise back to pre-pandemic levels of around 10%. Also important to factor in are your municipal rates and taxes, water and electricity (unless charged for), complex levies and special levies in some cases.”
The most crucial element of success for any buy-to-let investment is a tenant that’s in good standing. “Covering your bills is important, but having a tenant that pays on time each month is critical. Thankfully, TPN’s data also indicates that tenants are in better standing than they have been in the past few years.”
Smee shares the following tips to ensure that your buy-to-let investment yields a return:
Think like an investor: “Thinking like an investor means taking all of the emotion out of it and basing your decision on facts and data. Make sure that you know the property, the area and what tenants in the area are looking for. So often, we see landlords with properties that overlooked the finer details such as a secure parking bay, quality finishes and secure guest parking. Factors like these can compromise the rental amount and demand for your property.”
Run it like a business: “Just like a business, a buy-to-let property requires time and effort. Make sure that you have your administration in order – draft a legally compliant written lease agreement, keep records of all communications, share invoices and statements and inspect the property regularly.”
Finances: “A buy-to-let property should be obtained in a budget that you can repay – regardless of whether you have income from a tenant or not. Do the math, check your affordability, know your credit score and have a good buffer for any unforeseen costs. Putting down a deposit also goes a long way in reducing your monthly bond repayments and potentially securing a better interest rate on the property – this adds to your profitability.”
Working out returns: ‘Gearing’ is a term commonly used when dealing with buy-to-let investments. “It refers to the property’s total cost of ownership vs the rental return. In a case where the rental that you receive outweighs the total cost of ownership, the property is positively geared.”
The other two metrics commonly used are Return on Investment (ROI) and gross yield. “Gross is the total gross rental collected from your property compared to the property’s market value or purchase price.”
To ensure returns, Smee urges investors to leave some ‘wiggle room’. “Consider changes in the economy, changes to your job, tenants leaving, tenants missing payments, additional costs such as repairs and maintenance, increasing municipal rates and of course, increases in the repo rate. Do all the math to make sure that you can realistically afford the property and can generate returns.”
Practice patience: Owning a property can be a hard but rewarding exercise. “The dividends of property investment don’t always pay off immediately and there will be challenging times, however, if you’ve done your math and have found the right tenant, then there’s no reason why you can’t succeed” he concludes
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