Buy-to-let purchasing has fallen off dramatically in the past year and current figures don’t bode well for its near-term recovery.

But should everyone now stop investing in property and the buy-to-let market?

Not necessarily, says FNB in its latest Buy-to-Let Property Survey. “Certainly, it can be a lot better than spending one’s money on consumer items, which is the alternative for many of SA’s low-saving households.”

However, the buy-to-let market could be a daunting challenge for the uninitiated and knowledge is therefore a key factor in growing your investment. The timing of your purchase, your personal financial situation, several legal and bank regulations as well as general economic factors all play a role in this segment and the investor should be thoroughly cognisant of these if success is to be achieved.

The first thing to consider, says Realty 1 International Property Group CEO, Hano Jacobs, is interest rates, which are currently at a 30-year low. “From an investment point of view this means that the monthly bond repayment on your rental property is now also at a new low and that a sizeable percentage will be covered by the rent your tenant is paying.

“Second, lower rates don’t mean that everyone can become a homeowner. The very strict credit criteria now being applied by the banks, high levels of debt and the recent return of home prices to real-term increases are going to keep a lot of people in the rental market for the foreseeable future.”

It is also worth noting, he says, that property development and residential building are still at historic lows following the recession, which means that the demand for moderately priced rental homes is likely to remain ahead of supply for some time to come, especially in the large urban centres. “This imbalance will ultimately result in rental increases.”

Jacobs says that during the next 12 months, pro-active investors will also still find property purchase opportunities at below market value – some created by developers with unsold inventories who want to avoid prolonged holding costs, and some by ordinary homeowners still struggling to weather the financial storm created by the recession.

“Nevertheless, caution is the watchword, and potential investors do need to be highly selective when it comes to buying rental properties, and to be very wary of over-extending themselves financially. Even in a strong rental market, investors should have the resources to cover 25% to 40% of the monthly bond repayment themselves for at least the first few years of ownership – or even better, to put down a really substantial deposit on the property.

“In addition, investors need to be clear on their strategy, and be looking for medium- to long-term gains from rental income and capital growth. This is not a market for speculators looking for a quick turnaround.”

Factors to be carefully taken into account in a rental property purchase decision, Jacobs says, include locality of the property with regard to convenience, consumer amenities and access routes. Also important to potential tenants are price, security, and proximity to schools and day care.

John Loos, property economist at FNB, says if one is a salaried individual in a corporate, it is risky to depend on discretionary rewards, such as bonuses and share options, to finance expenditure or debt obligations in weaker economic times. “These can easily fall away temporarily.”

He says even if one were stumble upon a property where the rental can cover 100% of a new 100% bond, the costs on top of the bond repayment, i.e. municipal assessment rates and maintenance costs, should also be taken into account.

Then there are also the risks that accompany tenants. “Like most things in life, tenants don’t come without risks, and some provision has to be made for this. Not unlike homeowners, tenants also feel the pinch of tough economic times and this will affect their ability to pay their rent and pay it on time.”

According to Tenant Profile Network (TPN), a rental credit bureau, as at the 1st Quarter (Q1) of 2010, 78% of tenants on their records were “in good standing” with regard to rental payment, therefore implying that 22% were not.

Loos also cautions potential or current buy-to-let investors that although the country currently finds itself in a low interest rate environment, it is still a case of “what goes down must come up” and vice versa.

“This often happens unexpectedly. In recent years, the typical interest rate hiking cycle has been 4 to 5 percentage points in magnitude.

“It is always wise to do some sort of scenario planning in this regard, especially when rates appear to be nearer to the bottom of the cycle, as would seem is presently the case. The rental may cover the bond at current interest rate levels, but would it if rates were to rise unexpectedly in the near term.”

Loos also warns that those who think they’re going to make a quick buck in a short period of time, will be bitterly disappointed in the current economic climate. “The speculative portion of buy-to-let investors doesn’t have cheap credit and huge capital growth to spur them on at the moment. Buy-to-let investment nowadays should be seen as more about buying into a rental income stream.” – Eugene Brink

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