What you should know about buy-to-let

At the re­cent Al­lan Gray In­vest­ment Sum­mit, res­i­den­tial let­ting ex­pert Michelle Dick­ens spelled out the fi­nan­cial and le­gal fac­tors that prospec­tive land­lords must take into ac­count. re­ports

Saturday Star - - INSIGHT -

BE­ING a land­lord can earn you a good in­come, but it is not for ev­ery­one. Buy-to-let prop­erty in­vest­ing has en­thu­si­as­tic pro­po­nents, such as Rich Dad, Poor Dad au­thor Robert Kiyosaki, but there are also many de­trac­tors, who ar­gue that you’re bet­ter off putting your money in the stock mar­ket.

If you are se­ri­ous about in­vest­ing in phys­i­cal prop­erty (as against in­vest­ing in­di­rectly via listed prop­erty shares or unit trusts), you’ll need to man­age your prop­erty as if you were run­ning a busi­ness and fully fa­mil­iarise your­self with the risks – and costs – in­volved.

Last week, at the Al­lan Gray In­vest­ment Sum­mit in Sand­ton, Michelle Dick­ens, the man­ag­ing di­rec­tor of TPN Credit Bureau, which spe­cialises in the ren­tal prop­erty sec­tor, pro­vided del­e­gates with an over­view of the res­i­den­tial ren­tal mar­ket, and had help­ful ad­vice for prospec­tive land­lords.

Dick­ens says it’s es­sen­tial to do your home­work to find the right prop­erty in the right area, tak­ing the fol­low­ing fac­tors into ac­count: • Prop­erty price; • Net yield, which is your ren­tal in­come mi­nus your ex­penses; and

• Risks, which in­clude how long your prop­erty may be va­cant in-be­tween lets, delin­quent (late-pay­ing or non-pay­ing) ten­ants and the le­gal­i­ties of re­mov­ing ten­ants.

WHEN AND WHERE

When you buy a prop­erty, and how much you pay for it, is vi­tal to the suc­cess or fail­ure of your ven­ture. Mis-tim­ing the mar­ket may mean re­ceiv­ing a lower ren­tal than you an­tic­i­pate and a lower price if you have to sell.

Over­all, the FNB House Price In­dex has shown lit­tle real (af­ter-in­fla­tion) growth since the 2008/9 fi­nan­cial cri­sis, in stark con­trast to 2004, the peak of the pre-cri­sis prop­erty boom, when South African res­i­den­tial prop­erty prices soared by al­most 30%. Dick­ens says it was easy to make money in those years, but it is less easy now.

Where you buy is also im­por­tant, not only be­cause some ar­eas ex­pe­ri­ence higher price growth than oth­ers, but also be­cause some ar­eas (not nec­es­sar­ily the ones with high price growth) have a higher de­mand for ren­tal prop­er­ties than oth­ers, and their yields may be higher.

The Western Cape is far out­strip­ping the na­tional av­er­age for yearon-year house-price growth (about 5%). Prop­er­ties on Cape Town’s At­lantic se­aboard are grow­ing at 29.9%, those in the City Bowl at 21.1% and those in the south­ern sub­urbs at 14.7%, ac­cord­ing to the FNB in­dex.

TPN’s mar­ket strength in­di­ca­tor for ren­tal prop­er­ties, which works on an av­er­age of 50% (when ren­tal de­mand equals sup­ply), shows that ren­tal de­mand in Gaut­eng is 50%, in KwaZulu-Natal it is 53.98%, in the Eastern Cape it is 62.86%, and in the Western Cape it is 73.25%.

YIELDS

You need to con­sider whether higher-value prop­er­ties are bet­ter ren­tal propo­si­tions than lower-value prop­er­ties in terms of both ren­tal yield and qual­ity of ten­ant.

Gross yields (ren­tal yields be­fore ex­penses) dif­fer across ren­tal brack­ets and ar­eas.

Sec­tional-ti­tle units com­mand higher gross yields than their stand­alone coun­ter­parts (see graph). Sec­tional-ti­tle prop­er­ties are gen­er­ally smaller and less ex­pen­sive, so the yields you are likely to achieve are higher than on larger, full-ti­tle prop­er­ties, Dick­ens says.

TPN di­vides the prop­er­ties on its data­base into five ren­tal brack­ets: un­der R3 000 a month (22.5% of res­i­den­tial ten­ants), R3 001 to R7 000 (the ma­jor­ity of ten­ants, at 53%), R7 001 to R12 000 (17.1%), R12 001 to R25 000 (5.6%), and above R25 000 (1.6%). Prop­er­ties in the two mid­dle brack­ets, rep­re­sent­ing rentals of be­tween R3 000 and R12 000 a month, show the low­est va­cancy rates (6.78% and 6.04%, with the na­tional av­er­age 8.04%). They are also the brack­ets with the high­est per­cent­age of ten­ants in good stand­ing – ten­ants who paid the ren­tal on time, in the grace pe­riod, or paid late (see graph).

Price-wise, you should be look­ing at pay­ing 10% to 15% less than the av­er­age prop­erty price in a par­tic­u­lar area, she says, to earn a rea­son­able re­turn on your in­vest­ment af­ter fac­tor­ing in all the costs.

To work out the an­nual re­turn on your in­vest­ment, do the fol­low­ing cal­cu­la­tion: sub­tract from your ex­pected an­nual ren­tal the on­go­ing ex­penses for which you will be li­able, such as levies, insurance, rates and main­te­nance. Di­vide this fig­ure by the to­tal of the fol­low­ing: pur­chase price, plus trans­fer duty, plus con­veyanc­ing and bond costs, plus pos­si­ble ren­o­va­tion costs. The re­sult, mul­ti­plied by 100, is your net re­turn ex­pressed as a per­cent­age be­fore tax.

With re­gard to an­nual ren­tal in­creases, Dick­ens says gone are the days in most parts of the coun­try when you could in­crease the ren­tal by 10% a year. Only in the Western Cape do ren­tal es­ca­la­tions cur­rently ap­proach that fig­ure, at 9.88%. The na­tional av­er­age is 4.37%, with the Eastern Cape at 5.9%, Gaut­eng at 3.87% and KwaZulu-Natal at 0.68%.

martin.hesse@inl.co.za

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