Be streetwise before buying to let

For some investors, buy-to-let again looks appealing — even though the recent rate increase and a swathe of economic data point to the likelihood of more enforced fiscal belt tightening.

The premise is that interest-rate pressure is causing more households to rent — either because they can’t afford current bond repayments, or because they’ve postponed the decision to purchase until the next interest rate decline.

This, combined with a growing middle class, means there’s increased demand for rental property.

But while this may seem a compelling argument, the reality is more complex.

Despite the interest rate rise, there’s an enduring perception that buy-to-let is a low-risk, high-reward investment.

But for most people buying a property means taking out a bond, and in the current environment people need to be careful before they make what is a significant long-term commitment.

While some fortunate buyers may be able pay cash for a property investment, most will have to dip into home loans to pay the deposit and then take on substantial debt.

Would-be landlords need to understand some of the factors that can influence the rental market and have a clear idea of the return they’ll need to make to cover their costs.

The SA rental market is still comparatively volatile when compared with the established overseas markets.

Interest rate increases and declining rentals because of a glut of rental properties in an area suddenly increases, or a spate of crime that causes a suburb to fall out of favour, are just some of the factors that can affect returns. And while most property experts seem to agree that rentals are likely to increase over the next 12 months, these returns are likely to be offset by rate increases and higher inflation.

This, combined with a slowdown in the property market, may make it difficult for buyers who’ve overextended themselves to recoup losses.

Property isn’t as flexible as other investments, so you can’t suddenly switch your money if the environment changes.

A growing middle class and increased rental returns can make buying-to-let a good way to grow wealth, but like any other investment buyers must do their homework and be realistic about the costs and returns. — Old Mutual Bank CEO Japie van Niekerk

Sunday Times
11 September 2006 11:00:00 AM

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