The time is now!

Now is the time for buyers with spare cash to invest in the buy to let market, provided they follow some tried and tested rules.

So says Mike Bester, CEO of Realty 1 International Property Group. “If you are thinking of investing in residential property, it’s probably a good idea to do it now rather than later,” says Bester. “The rental market is currently booming as a result of diminishing affordability of mortgage payments, especially in the lower income brackets, and because of the glut of stock on the market as well as the desperation of some homeowners to sell. There are bargains to be found.”

The biggest demand for rental properties is in the lower-income areas where people simply cannot afford to buy their own homes. Yields in these markets are generally good too — around 10 percent for properties under R500 000.

Rental market on the up and up

Buy to let is an excellent way of building a property portfolio, says Bester. The rental market is expected to go from strength to strength and stats for the past three years are an indication that the market is on the up and up. Figures for rental prices recently released showed rents having risen year on year by 6.43 percent between mid-2005 and 2006, by 6.88 percent over the next twelve month period and by 8.26 percent between 2006 and 2007.

“This indicates a growth in monthly rental prices of 30 percent on average in the past three years,” says Bester. “This means the long term outlook is very good, particularly when one takes account of the tax benefits available on rentals, such as the deduction of expenses like rates, interest payments on the bond and repairs to the property.”

Ismail Laher, principal of Realty 1 Bedfordview, agrees. “Prices are currently still a bit high,” he says, “but over the next six months or so buyers should really be able to pick up bargains.” Laher is in the process of starting up a rental division, so as to be able to offer this service to his clients.

However, there are certain criteria that must be applied if the investment is to succeed, warns Bester. “Firstly, you need to have a good deposit,” he says. “You can’t buy with an 80 percent to 100 percent bond and expect to get a rental that will cover your bond repayment.”

Marsha Haupt, sales director of mortgage originator Betterbond, agrees. "The [current] gap between rental and bond repayment rates in metro areas is approximately 65 percent of bond repayments," said Haupt.

"Therefore on a bond of R500 000, the repayment would be R6585 whereas rental would be around R4300". In non-metro and coastal areas the gap is about 60 percent, so with reference to the same example the rent would be R3900," she said.

However, with a deposit of R250 000 on a property of R500 000, the repayment at a 15 percent interest rate would be only R3300 per month, which makes renting viable in any part of the country. Certain banks offer home loans specifically designed for the buy to let investor that take account of the potential rental income in the application process.

“And in the case of sectional title, the rental also has to cover the levy,” says Bester, “or the owner will be paying out of his own pocket to maintain the property.”

Invest for the long term

The second ‘golden rule’ is to invest for the long-term. Capital appreciation on property is traditionally a long term investment and buyers in this market should focus on building their wealth over time, not on quick profits. “This way, the investor won’t be affected quite as much by short-term fluctuations in the market,” says Bester.

Thirdly, the focus of the investment should be income, not capital growth. “Owning a property is not necessarily wealth,” says Bester, “but having a steady income from a portfolio of rental properties is and one should never underestimate the advantages of maintaining cash flow.”

Bester also warns that buyers should be wary of ‘get-rich-quick’ schemes involving ‘spec buying’ or rental guarantees, usually offered on new developments as a way to entice buyers.

“Many of the guarantees are not worth the paper they are written on,” he says, “and in order to take them seriously the investor needs to find out who the guarantor is and how the guarantee will operate in the absence of a lessee.”

And finally, leave the management of rental properties to a professional. “It’s worth the few Rands that letting agents charge in commission for them to handle the dirty work,” he says.

With 2010 around the corner already driving the corporate and holiday rental market, Bester believes the buy to let market in South Africa is looking good for the next two to three years.

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