Good reasons to buy rental property

NO GET-RICH-QUICK SCHEME: RENTAL YIELD IS A MAKE-OR-BREAK FACTOR Due to affordability and bond application challenges, more people are expected to rent than buy.

There are signs of recovery in the buy-to-let market and yields are favourable.

Good news for anyone considering buying a rental flat, townhouse or free-standing home: there are signs of recovery in the buy-to-let market. The average gross rental yield has recovered since 2007-lows of 7.28%, with landlords achieving 9.06% yields in 2016’s third-quarter (Q3), according to FNB and Tenant Profile Network figures.

Rental yield measures the percentage of rental income relative to the property’s value (ie. return for landlords). When house prices weaken, rental yield rises and vice versa.

House prices are barely growing at an inflation-beating rate, which should boost rental yields. SA’s nominal house prices (before inflation) have been on a downward trend, accelerating 4.9% in 2016, 6.5% in 2015 and 7% in 2014. In real terms (after inflation), house price growth has been negative.

FNB’s John Loos, like other economists, expects house price growth to slow in 2017 to a 3% average.

But this doesn’t mean rental yields will rise for properties across SA.

Loos said would-be investors should be location-specific when looking for a good property investments, as some regions show resilient house price growth and others not. For example, the Western Cape, specifically Cape Town, may not be a good area for attractive rental yields due to its steep house price growth.

FNB’s data shows Western Cape house prices are up 53.7% on average over the last five years (driven by ongoing “semigration”). KwaZulu-Natal, the Eastern Cape, and Gauteng are the laggards, with a cumulative growth of 30.2%, 26.6%, and 24.7% respectively.

“The market has run hot in Cape Town for a long time and yields have probably compressed. If I was a buy-to-let investor, I would be optimistic in Gauteng and not the Western Cape.”

He suggests investors first ask what an area’s yield is, then see if they’re happy with it.

PayProp research shows landlords are still achieving above-inflation rental growth, with the average year-on-year rentals in Q2 2017 growing 6.87% to R7 080. The Western Cape is the most expensive province to rent in, R1 151 over the national average.

PayProp’s Johette Smuts said the R5 000-R7 000 monthly rental category is the “sweet spot”, with the most tenant demand. Properties are typically bachelor, oneand two-bedroom units.

Due to consumer affordability challenges and onerous requirements to qualify for a mortgage, more people are expected to rent than buy.

Standard Bank’s Andrew van der Hoven warns against trying to time the market. “People assume that property prices are going up and there are good returns. [But] it’s not a get-rich-quick scheme.”

An investment property requires a long-term horizon of 10-30 years – depending on the investor’s financial position. Van der Hoven said running property costs such as insurance, municipal rates and taxes and maintenance could impact an investor’s financial position.

Also, property income is taxable. However, Smuts said interest on mortgage (not monthly payments), and some insurance and maintenance costs are deductable.

Arguably the biggest cost is the bond, which can influence your investment time horizon.

If you opt for a 100% bond, a five-year investment horizon is short. But putting down a sizable deposit makes a five- to 10-year horizon plausible. The higher the deposit, the lower the bond interest charged and higher rental income achievable.

This article was first published on investor.moneyweb.co.za