13 Jun 2013
For those wanting to make money from property, it is good idea to look at buy-to-let investments because when you buy right, your home will always find a tenant.
According to Martin Goodman, director of Torus Capital, property is always going to be a good investment in the long run, so if you take a long-term view, you cannot go wrong.
Goodman notes that the prospects of the rental industry are good and the trends are pointing in the right direction.
Read the 10 reasons why you should buy property for tips and insights into property investments.
A case for investment
A recent survey by Torus Capital reveals that 60 percent of property owners were selling in order to rent due to challenging economic conditions, 82 percent believe the rental stock available does not meet demand in South Africa, 85 percent say 2014 will see growth in the rental property market.
“An increasing number of people are choosing to rent rather than buy – so much so that the rental stock available does not meet this demand, as such, there has never been a better time to be a landlord,” says Goodman.
“Investors need to balance price with rental return and it is often the properties that are in good areas with high rental demand bought at a good price that prove to be the best investment properties.”
Currently in Ballito rentals are increasing due to stock shortages so investors' yields will also increase, he notes.
According to Bill Rawson, chairman of the Rawson Property Group, with this expected growth, it is perhaps wise to invest in two to four lower priced properties than one big substantial unit.
This is not to say that investors should not look at expensive properties - when buy-to-let properties have tenants, then the landlord has money in his pocket and when these properties sell, they fetch a premium as they appeal to buyers.
“Currently, it is the smaller units that appreciate in value the fastest and earn the best rents in relation to the capital outlay.”
As an example, he says, two R1 million units will probably give a better return than one priced at R2 million. Similarly, three properties priced at R700 000 will yield a better return than one priced at R2.1 million.
“With one unit, the risk is focused and concentrated on a single tenant – but spreading one’s risk is one of the oldest and wisest investment strategies and has always been favoured by landlords,” he points out.
Compared to commercial property, he says demand in residential property is so great that new tenants can almost always be found within one or two months.
While a tenant living in a home will often do all he can to stay there, the industrialist or trader in financial trouble is inclined to put the landlord at the bottom of his payment list and is often only too glad to get out of the premises and ignore the lease conditions, says Rawson.
What’s more, Rawson says the big advantage of buying property (as compared to most other assets) is that it can be geared by means of a mortgage bond, thereby greatly increasing the investor’s return on his capital outlay, which can be relatively small.
From their experience at Rawson Finance, buyers are obtaining home loans as their success rate is over 70 percent and this is more or less true of all the major bond origination companies operating in South Africa today.
“The challenge of getting a bond is not as great as many people realise, provided they have a strong income stream,” he says.
Challenges facing landlords
Goodman explains that the survey points to challenges faced by landlords when renting out property.
According to the survey, 65 percent of landlords noted that dealing with damages to property was the biggest difficulty when it comes to tenants, 3 percent said the deposit always covers damages caused by tenants, others include the fact that 43 percent of tenants abscond, 43 percent have to be evicted, 38 percent accounted for deposit disputes, 18 percent legal costs and 4 percent of landlords say they have never had a tenant abscond.
Goodman says the above highlight the importance of vetting all tenant applications and conducting thorough in and out inspections.
The vetting of tenants and application process were listed as the most time-consuming administration tasks along with maintenance (62 percent), lease renewals (34 percent), legal procedures (31 percent), evictions (29 percent) and deposit disputes (24 percent).
According to Goodman, while the results suggest a thriving rental market ahead, the sector needs a new property letting tool – a way for landlords to take advantage of this encouraging forecast for the industry without facing the pitfalls that come with renting property.
Torus Capital has launched Rentshield, a zero deposit tool that takes care of all the legwork that comes with renting property and protects landlords far more than a traditional deposit would.
Among the benefits of this, the landlord gets a comprehensive online tenant vetting facility, in and out inspections, and protection against all the stresses associated with residential letting, including non-payment by the tenant (for up to three months) and repair of the property (up to the value of one month’s rent).
Rawson notes that sometimes, the landlord is approached by three or four people (especially young people) to split the rent among them and bill them each individually.
That can be a dangerous route to follow because all too often one or perhaps two of the signatories to the lease default and their co-tenants are either incapable of carrying them or do not feel obliged to do so.
“It is essential to have one person accepting the responsibility and being accountable to the landlord,” says Rawson.
Rawson warns that unless the property investor has a legal background or years of experience, he should always bring in a good lawyer and a good rental agent when drawing up the lease.
“It is only too easy to leave loopholes which an unscrupulous tenant can and probably will exploit, as such, leases have to be drawn up so that they cover every possible contingency,” according to Rawson.
Allen points out that landlords need to realise that when buying a property as an investment, there is risk as with any business.
Regardless of how good a potential tenant’s credit score results are, there is no guarantee that the tenant’s circumstances won’t change due to retrenchment and divorce for example.
Maintenance costs are also not predictable and can lead to unforeseen costs, says Allen.
While challenges will always exist, he advises investors to hunt for bargains, minimise risk and stay in the highest rental demand bracket of between R5 000 and R9 000 a month in the Dolphin Coast area.
On investment property prices, he says in the area are priced between R750 000 and R1.5 million.
“You can never remove all risk from an investment but you can manage it by making informed purchases,” says Allen.
He notes that most rental agencies offer two main services, tenant procurement only (place a tenant only) and full management on a monthly basis.
Often an investor will choose the tenant procurement only option with a tenant who passes a credit check, but then run into problems due to lack of experience in managing a property.
“Most investors don’t realise how much time, energy and admin goes into chasing rental and utility payments and sorting out maintenance issues,” he says. – Denise Mhlanga
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