By all means buy-to-let, but recognise the risks, says Michael Bauer

Throughout his career in property, says Michael Bauer, general manager of the sectional title management company, IHFM, he has recommended that people invest in buy-to-rent property – but only if they have accepted the reality that there can never be any such thing as a no-risk investment.

“The buy-to-let market,” he says, “is under normal conditions a sound, if unspectacular, place to put your money – but tenants can and do cause problems which can result in the landlord losing several months’ rental from time to time. If you are not able to ride out those periods, it is better not to invest in property.”

In his experience, says Bauer, quite a high percentage of buy-to-let investors go into this investment without understanding and calculating the risks and with too small a buffer reserve.

“The big advantages of investing in property are that it is usually possible to gear the investment with a bank loan. This means that, in addition to your rent, for many years you will get a capital gain on a sum far larger than the money you have actually put down.

“However, even capital gains cannot be guaranteed in the short term. Recessions and oversupply in any area can quite easily result in there being no capital gains for a year or two – and rentals are often kept low by the same factors.”

Quite often on new developments, says Bauer, buyers will have to wait until the available stock is all taken before they see value rises – which is why on a well managed project like Bardale Village (at Kuils River) developers go ahead in phases limiting the stock available to the market demand and possibly also controlling the ratio of owner-occupiers to investors.

Sectional title property investments at the lower end of the market, added Bauer, right now in SA probably offer the investor the best returns because demand here outstrips supply by a large margin. This situation will continue until the banks ease up on the National Credit Act criteria for all potential homeowners.

However, he says, it is also true that rent defaulting tends to be higher at the lower end of the market, Bauer warns that a high percentage of bodies corporate are in arrears on the creditor payments.

“It is absolutely essential, therefore, before buying into a sectional title scheme, to see their financial statements, especially the minutes of the last three trustee meetings and those of the last Annual General Meeting. It is also important to check on the reputation of the managing agent –most are competent but some simply do not know how to run a sectional title complex so that it remains in the black.”

Bauer warned, too, that it is not only the low cost schemes and the lower income tenants who can give trouble. One or two very affluent projects, he said, have also seen levies or rentals going unpaid for long periods.

Looking back over 10 to 15 years, said Bauer, it is clear that on the schemes he has tracked, total returns on investment (capital gains and rent yields) have averaged ±9% per annum (which he says confirms that this is a sound asset class).

“In general, I advise people to invest in property only when the first year net rental yield (i.e. gross rent less direct operating expenses such rates, levies, insurance) is above 7% per annum. Given the current low interest rate environment property investors can break even within the first three years. If you then fix your interest rate you will probably enjoy a sound investment with great capital gains rivalling those of any other asset class.”

Article by: www.ihfm.co.za