Investing in rental property in South Africa
Despite the economic downslide, property investment remains a profitable endeavour, especially with pent-up demand unleashed during the lockdown. If you are looking to get into the property investment market in South Africa, these tips will be helpful.
A succession of interest rate cuts intended to boost the economy has resulted in the lowest lending rates for decades. If you’re looking to take your first step into the South African property investment market, now is a good time.
Buy-to-let is the bread and butter of property investment
Buy-to-let is the go-to option for investors, allowing you to generate monthly income from properties in your portfolio. That’s not to say there are no risks involved, but with careful planning, buy-to-let provides a reliable source of revenue in the long term.
If the property is bonded, in the beginning, you’ll be using the rental income to pay off the bond on the property, as well as whatever other expenses go along with it such as maintenance costs. As such, the potential rental yield will be your primary concern when determining whether to invest in a property.
“It’s an important figure and it’s simple to calculate,” says Rhys Dyer, CEO of ooba Home Loans, South Africa’s largest home loan comparison service. “The yield is simply the annual rent you’re earning on the property divided by its value, expressed as a percentage. So, a house worth R1 million, on which the annual rent is R120 000 (R10 000 a month) would yield 12%.”
You can get an idea of prospective rental yield on a property investment by looking at rental prices for other properties in the area. Generally, one-bedroom and studio apartments make for a good property investment, as those property types have a history of delivering consistently over the course of 12 years.
Because of the current economic climate – characterised by low growth rates, high inflation, high unemployment, volatility in financial markets, and dwindling consumer confidence – Standard Bank suggests that there are two contrasting factors to bear in mind before investing in a rental property:
- First, when interest rates go up, so do the monthly repayments on your bond, which has an impact on the rent you charge, and how affordable your rental property will be for tenants.
- Second, a spike in interest rates makes it more difficult for people to buy property, resulting in more consumers being forced to rent as they cannot obtain a home loan from banks.
While this presents an opportunity for you to try your hand at becoming a landlord, you should consider the following factors before you put in an offer on your rental property:
- Location and property types
- Identify all the costs involved
- The advantages of investing in property
- Risks to consider in investment property rental
Consider buying and renovating properties to boost value
Purchasing older property investments and conducting smart renovations to boost their value is another shrewd investment strategy, and one that happens to be quite fulfilling as well, as you are able to apply your own creative talents to the task.
As a general rule, kitchen renovations are most effective at boosting property value, as it’s often said that kitchens sell properties. They can get expensive though, whereas bathroom renovations provide a relatively cheap way to enhance the property’s aesthetic appeal.
Shop around for the best deals on bonds
In most cases, you’ll need to obtain funding before investing in a property, which usually comes in the form of a home loan granted by the bank. However, each bank has different lending criteria, some of which may result in more favourable interest rates for you.
It pays to shop around for the best deal. This is made easier if you acquire the services of a home loan comparison service such as ooba Home Loans on this link: https://www.ooba.co.za/ or Better Bond on this link: https://www.betterbond.co.za/, who can apply to multiple banks on your behalf.
Types of property investment
Property investors need to stay abreast of trends in the property investment market, which can be affected by political and economic factors. For example, sectional title properties generally perform well in South Africa due to their popularity with students and first-time home buyers. Properties in gated communities are also expected to perform well, due to security concerns. Trends also vary by area.
Standard Bank advises that pinpointing appreciating and depreciating areas is important. Factors like the rezoning of districts and crime statistics affect the value of property in certain areas. While properties close to schools, centres, services, and main areas are more attractive to most middle-class tenants. However, over-supplied areas that are undergoing mass development could force you to drive your rental price down to compete with similar properties in the area.
It is also advisable that before you approach an agent and that you research property sale and rental trends before deciding where to invest or download a free report on your desired suburb from Standard Bank on this link: https://www.standardbank.co.za/southafrica/personal/products-and-services/borrow-for-your-needs/home-loans/looksee-property-guide
Diversify
That said, don’t allow yourself to become too fixated on certain property types or areas. Investing in a broad range of properties, spread across different areas, will make your portfolio less susceptible to market fluctuations.
Take it slow
Remember that property investment is an extended game; the slow and steady alternative to playing the stock market. You shouldn’t go to the industry if you’re looking to get rich quickly.
It requires long-term strategy and planning. Selling properties is generally not advised, not even to fund the purchase of another property. The various legal costs, fees, taxes, and so on can take a sizable chunk out of the profits, so the smarter option is almost always to keep the property and use it to generate income in the long term.
How to invest in property with no money in South Africa
According to Fayyaz Mottiar, Fund Manager of the Absa Property Equity Fund. “The alternative to owning a physical property is to invest in the real estate market through property funds. A property fund is a mutual fund that invests in publicly-listed real estate companies,” said Mottiar . “It gives an individual the opportunity to invest in a range of properties through the purchase of stock. Property funds buy you a stake in real estate companies listed on the Johannesburg Stock Exchange (JSE) – saving you the headache of maintaining the property and dealing with dodgy tenants.”
In this way, you become a property owner without having to physically buy or finance the property. Depending on which fund you use, it also gives you access to foreign property markets as well – serving as a hedge against the rand when needed. You then earn your returns through rental collection,”
“Sparing you all the admin that comes with owning physical property, real estate companies buy property, collect rent, and pass the majority of the money to shareholders. Property companies pay out about 90% of their income to shareholders. So, you’re effectively sitting there as a rental earner,” said Fayyaz.
