With interest rates still off their pre-Covid highs, rental vacancies declining, and rental growth recovering, now might be the best time to take the plunge and buy-to-rent.
Buying to let is the act of purchasing a property with the intention of leasing it to a tenant so that you can receive rental income, explains Chris Xotongo, sales property practitioner at Just Property Port Elizabeth.
“This allows you to grow wealth through an asset while someone else contributes to your mortgage bond.”
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The best approach, he says, is to research the property you are considering purchasing. Is it situated in a position that is, and will continue to be, attractive to tenants – and, in time, future buyers? Is it well maintained? Are like-minded people invested in the area or development?
Once you have done this, Paul Stevens, chief executive of Just Property, says you need to run rental income projections of how much you can rent/lease the property for.
“The accepted current standard is to charge between 0.7% and 1.1% of the property’s market-related sales value in relative terms. Compare this figure to average rentals in the area to get an idea of whether the property will be a good investment.
Ideally, Xotongo adds, the rent should significantly contribute to your mortgage repayments and maintenance expenses, thus ensuring its capital growth.
“But you also don’t want to price yourself out of the market.”
Capital growth 101
Capital growth is the term used to describe the change in property value over time, Stevens explains.
“If you bought a property for R900 000 in 2012 and sold it for R1 350 000 in 2021, the capital growth would have been 50%. Capital growth can be difficult to forecast, and you must remember that house prices can also fall. If capital growth is important to you, consider the region, town and type of property that you buy. Historical house price trends may be an indicator of future performance, so you may want to inform your decision regarding property location by reviewing regional trend data.”
Is now a good time to invest?
Citing the PayProp Rental Index 2022 Q2, Stevens says rental growth was 2.5%, 2.6%, and 2.7% in April, May, and June respectively. Although the upward trend seen since April has been gradual, it “remains encouraging”. PayProp also reports that the percentage of tenants in arrears is lower than it was in 2020 (24.9%) but has increased marginally from 18.4% to 18.5% in the last quarter.
In addition, the national vacancy rate has had a sharp decline from 13.31% to 8.26%, according to the TPN Vacancy Survey 2022 Q1. However, this is still above the pre-pandemic low of 7.47% achieved in Q1 2022. PayProp also reports that the percentage of tenants in arrears is lower than it was in 2020 (24.9%) but has increased marginally from 18.4% to 18.5% in the last quarter.
So should you take the plunge now and buy-to-let? Well, Stevens says, it all depends on a few factors.
“Beneath the national figures on tenant numbers lie significant variations from region to region, town to town, and even street to street. As a landlord, you need to know your location, your tenants and, crucially, your likely returns.”
That said, Xotongo notes that macro pressures of rising interest rates and the ever-increasing cost of living as a result of inflation have resulted in many first-time home buyers feeling the pinch, and purchasing activity in this segment waning.
“Those who might have been considering buying, are now opting or being forced, to rent. Increased demand is good for the rental market.”
Of course, interest rates, while rising, are still low and, according to ABSA projections, will only reach pre-pandemic levels in 2023 or 2024. If your calculations and research have identified a good buy-to-let proposition, now is a good time to purchase, says Stevens.
He adds: “Changing demographics, more mobile working patterns, and relaxing attitudes to homeownership are driving more people to consider renting. Such attractions help to explain why letting property is a growing business. Yet anybody tempted to become a landlord must understand the risks and responsibilities involved, whether that property is one they already own or one they are looking to invest in.”
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