Traditionally buying to let (BTL) has been considered a good investment; buy a rental property with a small deposit and large mortgage. Rent it out, the tenant pays off the bond and with regularly increased rentals, covers all costs and more. 10 years or so later the bond’s paid off and investors can either live off the rent or sell for a nice profit. But our experiences in 2016 leave the potential impact on the property market looking slightly unnerving.
Recently, Magnus Heystek, director and research head at Brenthurst Wealth Management wrote a Moneyweb article titled “BUY TO LET HAS BECOME BUY TO REGRET”. Said Heystek: “ A perfect storm has now hit the buy to let market and literally tens of thousands of investors countrywide, perhaps with the exception of the Western Cape are, according to one BTL owner, ‘slowly being squeezed to death by a giant financial anaconda’. Rates and taxes have been rising on average at almost double the inflation rate per annum over the past five years and more. Under current economic and political conditions in South Africa, according to Heystek, BTL could prove to be “very costly” to your personal wealth.
At the peak of the property BTL market during the 2002 – 2008 boom, such was the attraction of BTL market that in 2008 almost 25% of all South African residential property sales were in the BTL category according to FNB. Today, Heystek estimates that figure to be less than 6% with commercial banks tightening on granting of bonds and likely to reduce further in months ahead. He adds “ As properties get older, maintenance costs rise while property values both in real and in some cases nominal terms – decline. Since 2008 the residential property market has declined by about 20% in real terms and is still firmly in a bear market”.
As Anne Schauffer of the Property Professional magazine reports advice on BTL from various industry leaders:
• Do proper research don’t restrict yourself to your immediate area but research areas where rental yields may be much better. • Buy only where there is a constant, proven, keen demand. Ensure the area has a healthy market for tenants. Consider convenience and accessibility – good transport systems/ schools/ retail facilities. Is there a factory, college, commercial centre nearby? • Check out figures achieved for similar apartments in the area. Ensure there is a match between purchase price, achievable rentals and demand. • Work out mortgage bond figures: will the rental cover their costs with some residue for emergencies and possible bond rate increases? • Keep a record of all expenses for tax purposes. • Possibly the best property to attract the biggest tenant market is a two bedroom house/flat. • Be cash flow positive from day one: include a steady annual increase in rent in the lease. Have each potential tenant very carefully vetted and credit checked. • Consider your options before making this type of investment. Don’t expect stellar returns as a matter of course. It makes more sense to diversify your investment portfolio to add property into the mix. With the economic decline we are experiencing now, rental returns are likely to dip again, even in the Cape.