Buy-to-let: How to choose property

There are several factors to be taken into account when deciding on a buy-to-let property, says a leading property industry figure.

“Factors to take into account include the nature of the property – its accommodation, area, quality (whether aimed at executives or the general market for instance) and whether it’s a townhouse, cluster home or standalone dwelling, each of which has different ‘pull’ in the rental market,” says Gerhard Kotzé, CEO of the ERA South Africa property group.

Generally, clusters and sectional title units command slight premiums because of their lock-up-and-go convenience and greater security, he points out.

Pricing rentals is similar to that of pricing a property for sale in that like-for-like comparisons have to be made, he adds, and the general benchmark is that rentals should be about 1% of the value of the home, so that, for example, example, a R1m home should rent for about R10k a month.

“The market softened slightly at one stage and this benchmark percentage dropped, but it’s now back around the 1% level. However, advice from professionals is always recommended before setting a rental level.

“Supply and demand in a given area are further factors to be taken into account. For example, if a property is close to all major amenities, it generally rents faster and at a higher rental than one that’s in the ‘sticks’ – which underlines the need for selectivity when investing in a ‘buy-to-let’ property.

“Moreover, rental growth varies from city to city, with Tshwane/Pretoria showing a particularly good year-on-year (y/y) increase of 21,5% according to the latest Trafalgar group residential index, and Cape Town and East London showing only 9% and 9,5% respectively.”

Returns from rental property investments are expected to remain solid in 2010, Kotze says.

Leaving aside the exceptional rental demands associated with the World Cup and focusing on what he describes as the “conventional” market, he says the rental demand drivers that prevailed during 2009 will essentially be carried forward this year.

“People needing more time to assemble a deposit for a home, those who are in transition to a new part of the world following, for example, a business transfer, changing lifestyle or family imperatives that have created the need for upgrades or vice versa, all typically create demand for rental property as one would expect.

“But landlords seeking guidelines to asking rentals should be aware that, with economic conditions gradually improving, allowing increasing numbers of former tenants to buy properties of their own, competition for tenants is heating up.”

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