How to manage the risks when buying to let
Category Advice
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. But investors need to remain cautious, every opportunity comes with risk.
If you're looking at a property that already has tenants in it, investigate their payment history, and ask for a damage record. Growth in the rental market was below inflation for the greater part of 2019, with a slight uptick in 2019. Have we seen the bottom of the cycle? Growth will remain flat for the next six months but rental growth might recovery in the second half of 2020.
Generally speaking, property prices are increasing at a rate below inflation, which means that in real terms, there is actually negative growth in the South African 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.
It's a good time to look for properties that could be rented out, but be aware of the risks inherent in the market and take what action you can to mitigate them.
Identifying the risks
Buy-to-let-property should be regarded as a business purchase. This is not just a passive investment. Like any business proposition, it requires structure and it carries risk.
The following risks should be seriously considered before investing in buy-to-let property:
Tenants
If you're looking at a property that already has tenants in it, investigate their payment history, and ask for a damage record. Do they pay on time and do they look after the property?
Vacancies
If the property is not currently rented out, carefully research the vacancy rates of residential houses and sectional title flats in the area.
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?
The state of the suburb as a whole, and possible degradation risks
Is there a chance the property could decrease in value?
Capital gains tax
An increase in the value of the property 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.
Bank interest rates
If these increase over the long term, will you be able to cover the effect on your bond repayments?
Affordability
Is the property within your budget? Don't stretch yourself - you need to be able to cover the ongoing costs of property ownership once you've bought.
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. For example, 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 value of a property in such a location.
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 that is a far better marker than others' opinions.
Vacancy and good-standing rates also provide a valuable benchmark for buy-to-let investors, referencing the TPN Vacancy Survey, which shows the lowest risk properties falling between R 4 500 and R 12 000 per month.
In the third quarter of 2019, 62% of tenants had risk profiles of minimum, low or average. 38% of tenants with risk profiles of "high" and "very high" apply for credit checks on their system. And tenants' finances are stretched to the limit, and their research highlights an increase in credit defaults and distress borrowing.
This highlights the need to partner with a professional rental agent who can lead you to a well-maintained or well-built new property at a good price and in a great location, find and vet the best quality tenants and ensure they pay on time and manage any maintenance issues to keep those tenants happy.
There are opportunities in the current market, but investors should tread very carefully, be scrupulous about their research, and ensure they get the best advice from a knowledgeable agent of impeccable integrity. Asking people you know for a referral is a good place to start or look at public forums.
Author: Property 24 - Extracts
