Those buy-to-let investors targeting the lower end of the sectional title segment are likely to reap the greatest benefits.

But this price range also has some associated pitfalls.

Michael Bauer, general manager of IHFM, a sectional title management company, says before just plunging in, property investors should ascertain what the dangers are when buying to let in the sectional title segment.

"Right now, sectional title is the fastest growing sector in South African property - with most of the expansion focused on the lower end of the property market. The cost and time of commuting coupled to the densification of land use policies of most of the big metro councils will increase the demand for strategically sited sectional title units reasonably close to work areas, and all the indications are that the demand at the lower end of the market is and will continue to be the strongest.

“In addition, the prudent restrictions of the National Credit Act (NCA) will ensure that for the foreseeable future more people will be renting than buying, thereby again strengthening the landlord's position in the rental market.

"Investors putting their money into any category of property can, therefore, be reasonably sure of achieving a satisfactory return in the long term - and those who invest in units priced below R500k are likely to see by far the best returns."

Nevertheless, says Bauer, before plunging in, the new property investor should also realise that the chances of a tenant defaulting on rent payments are always there and, surprisingly, are noticeably higher at the top and bottom ends of the market.

“A national survey by RPM (Rental Payment Monitor) shows that 27% of top end tenants pay late and 9% not at all. In the under R3k market, 16% paid late and 12% did not pay at all. The survey also shows that the Western Cape has the most reliable payers.”

Investors need to be reminded there is a risk/return relationship, and if the returns are too good to be true, then this should be a warning sign.

In the case of default, he says, the landlord (with the help of the managing agent) must be objective and proceed immediately in instituting legal proceedings to evict the tenant.

However, the huge volumes of civil judgments and summonses issued by the Sheriff of the Court as a result of the current economic conditions have led to long “lead times”, with some summonses taking up to three weeks to be delivered. Obtaining an eviction order can, therefore, take up to three months.

“The courts are obliged by the PIE Act to be sympathetic to tenants, so it can actually take a further two or three months to get the tenant out - and then the landlord could find himself paying further costs fixing up the property. Landlords relying on rents to pay their bonds can find themselves in great financial difficulty."

There are, says Bauer, two ways of avoiding these difficulties. The first is to employ a managing agent who knows how to carry out thorough credit, background, financial, and reference checks.

"South Africa now has several good agencies checking on the credit and personal records including criminal records of people applying to be tenants and these checks, we have found, can be relied on to eliminate perhaps 90% of possible defaulters. Furthermore, if the landlord employs a managing agent it is likely that he will take action as soon as the tenant defaults and not be in any way sidetracked as so many landlords are when confronted by the difficulties the tenant may be going through."

The second way for the landlord to avoid financial difficulties, says Bauer, is to take out a landlord protection insurance against the defaulting tenants.

When a new tenant is accepted, the insurer will give this cover provided that the tenant's credit record is good and provided his primary residence is in South Africa - if he is a foreigner he may well be beyond the reach of the ordinary South African jurisdiction. If the tenant has given his current landlord any problems this will automatically disqualify him from being insured.

In normal circumstances, says Bauer, the insurance will cover six months rental loss and the legal fees for the eviction. Surprisingly, he says, there are still landlords who do not take out this insurance, regarding it (at a fixed fee of R135 per unit per month) as an unjustifiable expense. “This fee is tax deductible and considering the risk of default and of loss of income, this is, in my view, a small price to pay.

"All in all, however, the message should now be clear - provided that a good managing agent is employed and precautionary steps taken, investing in property is now very definitely an option that should be considered by any person seeking to build up a diversified investment portfolio and hedge against inflation."

John Loos, property economist at FNB, says buy-to-let investors should watch their budget closely when deciding to make such an investment. “Financial pressure is still the main reason why the buy-to-let market is struggling to recover, despite yields turning the corner. A significant portion of the household sector is still under financial pressure following the recent recession, and high debt levels persist,” Loos says.

Loos says weak capital growth is prevalent at the moment and buy-to-let properties should now only be seen as a way to buy to obtain an income stream. “Speculative buy-to-let buyers don’t have the cheap credit and huge capital growth that the boom years offered them and this element is therefore largely disappearing in the current economic climate.” – Eugene Brink

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