Manage buy-to-rent risks

The current buyers’ market offers a good opportunity for investors looking for properties to rent out, especially with the prospect of a potential rental-growth recovery in the latter part of 2020.

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But investors need to remain cautious. Every opportunity comes with risks. Generally, property prices are increasing at a rate below inflation, which means in real terms there’s actually negative growth in South Africa’s property market. This places us in a buyer’s market, where demand is low and sellers have to be more realistic when pricing their properties for a timely sale. This is good news for buy-to-let property investors; if they buy right, they may benefit from a good return on their investment in time. The following risks should be seriously considered before investing in buy-to-let property: 1. Tenants. If...

But investors need to remain cautious. Every opportunity comes with risks.

Generally, property prices are increasing at a rate below inflation, which means in real terms there’s actually negative growth in South Africa’s property market. This places us in a buyer’s market, where demand is low and sellers have to be more realistic when pricing their properties for a timely sale.

This is good news for buy-to-let property investors; if they buy right, they may benefit from a good return on their investment in time. The following risks should be seriously considered before investing in buy-to-let property:

1. Tenants. If you’re looking at a property that already has tenants in it, investigate their payment history, and ask for a damage record.

2. Vacancies. If the property is not currently rented out, carefully research the vacancy rates of residential houses and sectional title flats in the area.

3. Annual escalation in rental and monthly expenses. What are the rates and levies? Does this leave you with enough to see to all maintenance, etc?

4. The state of the suburb as a whole, and possible degradation risks. Is there a chance the property could decrease in value?

5. Capital gains tax. An increase in property value comes with its own issues – keep an eye on the capital gains tax you’ll have to pay when you sell, and ensure that your investment still attaches worthwhile growth.

6. Bank interest rates. If these increase over the long term, will you be able to cover the effect on your bond repayments?

7. Affordability. Don’t stretch yourself – you need to be able to cover the ongoing costs of property ownership once you’ve bought.

8. Legal costs. Do you have the wherewithal to cope with extensive procedures and accompanying costs should you need to evict a non-paying tenant?

Mitigating the risks

A good return on buy-to-let investments is determined by the research you do. Look at factors such as proximity to schools, universities, shops, amenities, highways and public transport. But beware of making assumptions. Being across the road from the main entrance of a school may seem favourable but the associated parking issues, noise and lack of privacy may actually negatively impact the property value.

Data from the Deeds Office showing what properties have sold for recently in the street of interest will give an objective indication of the market value of nearby properties.

Ingerisch is at Just Property Blouberg and Stevens is Just Property CEO