With interest rates still off their pre-Covid highs, rental vacancies declining, and rental growth recovering now might be the best time to take the plunge and buy to rent.
Buying to let is the act of purchasing a property with the intention of leasing it to a tenant so that you can receive “rental income”, explains Chris Xotongo, sales property practitioner at Just Proper Port Elizabeth.
“This allows you to grow wealth through an asset while someone else contributes to your mortgage bond.” The best approach, he says, is to research the property you are considering purchasing. Is it situated in a position that is and will continue to be attractive to tenants – and in time future buyers? Is it well maintained? Are like-minded people invested in the area or development?
Then run rental income projections of how much you can rent/lease the property for. “The accepted current standard is to charge between 0.7% and 1.1% of the property’s market-related sales value in relative terms,” says Paul Stevens, CEO of Just Property. “Compare this figure to average rentals in the area to get an idea of whether the property will be a good investment.”
“deally, the rent should significantly contribute to your mortgage repayments and maintenance expenses, thus ensuring its capital growth. But you also don’t want to price yourself out of the market,” says Xotongo.
Capital growth is the term used to describe the change in property value over time. “If you bought a property for R900 000 in 2012 and sold it for R1 350 000 in 2021, the capital growth would have been 50%,” explains Stevens.
“Capital growth can be difficult to forecast, and you must remember that house prices can also fall. If capital growth is important to you, consider the region, town, and type of property that you buy. Historical house price trends may be an indicator of future performance, so you may want to inform your decision regarding property location by reviewing regional trend data.”
“An experienced agent who is active in the area you are considering is essential to the process of evaluation,” adds Xotongo. “They should be able to advise you on current average rentals and historical purchase prices for comparable properties.”
What is the current state of the rental market?
According to the PayProp Rental Index 2022 Q2, “rental growth of 2.5%, 2.6% and 2.7% in April, May, and June respectively. The upward trend seen since April 2021, although very gradual, remains encouraging”. And the national vacancy rate has had a sharp decline from 13.31% to 8.26% (TPN Vacancy Survey 2022 Q1). However, this is still above the pre-pandemic low of 7.47% achieved in Q1 2022. PayProp also reports that the percentage of tenants in arrears is lower than it was in 2020 (24.9%) but has increased marginally from 18.4% to 18.5% in the last quarter.
Does that mean it’s a good time to invest?
“Beneath the national figures on tenant numbers lie significant variations from region to region, town to town, even street to street,” warns Stevens. “As a landlord, you need to know your location, your tenants, and crucially, your likely returns.”
That said, the macro pressures of rising interest rates and the ever-increasing cost of living as a result of inflation have resulted in many first-time home buyers feeling the pinch, and purchasing activity in this segment has waned. “Those who might have been considering buying, are now opting or being forced, to rent. Increased demand is good for the rental market,” says Xotongo.
Of course, interest rates, while rising, are still low and, according to ABSA projections, will only reach pre-pandemic levels in 2023 or 2024. If your calculations and research have identified a good buy-to-let proposition, now is a good time to purchase, says Stevens.
The work-from-home and semigration trends continue, also driving demand for rental properties. In terms of semigration, FNB reports that “relocation within SA has increased from 8% in quarter 1 of 2020 to 13% in quarter 2 of 2022, in line with the changing housing preferences due to [the work-from-home] trend. Internal data shows that the semigration trend is largely driven by the relocation path from GP to the neighbouring North West province (Hartbeespoort) as well as coastal towns in the Western Cape (Hermanus, Mosselbay, George, Cape Town) and KZN (mainly Ballito)”.
Chris Schoombee, investor relations manager at Just Property Zululand, says there is money to be made now from buy-to-let properties purchased at the right price, in an area that offers in-demand amenities. “Demand drives the expected rental yield, so it is also important to understand (a) what local tenants are looking for and are willing and able to pay and (b) what other properties are in the market that you are competing against,” he adds.
Stevens concurs. “Prospective investors should consult with property practitioners who are active in the area of interest. A professional agent should be able to share data-driven insights, as we do, on what properties will earn the highest rental income. Looking objectively at what the data is telling us takes the emotion out of buying a property to let.”
Experts predict that the supply of tenants will continue to increase over the coming decade, he says. “Changing demographics, more mobile working patterns, and relaxing attitudes to homeownership are driving more people to consider renting. Such attractions help to explain why letting property is a growing business. Yet anybody tempted to become a landlord must understand the risks and responsibilities involved, whether that property is one they already own or one they are looking to invest in.”
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