Property remains a good way to earn a passive income

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BUSINESS NEWS - With interest rates still off their pre-Covid highs, rental vacancies declining and rental growth recovery, 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.”

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?

Then 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,” says Paul Stevens, CEO of Just Property.

“Compare this figure to average rentals in the area to get an idea of whether the property will be a good investment.” “Ideally, 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,” says Xotongo.

Capital growth is the term used to describe the change in property value over time. “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%,” explains Stevens.

“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.”

“An experienced agent who is active in the area you are considering is essential to the process of evaluation,” adds Xotongo. “They should be able to advise you on current average rentals and historical purchase prices for comparable properties.”

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TOP TIPS FOR LANDLORDS

Thinking about investing in a property to rent out? Just Property outlines the biggest challenges landlords are facing right now and how to deal with them.

What is the current landscape?
According to the PayProp Rental Index 2022 Q2, the percentage of tenants in arrears is still lower than it was in 2020 (with a high of 24.9%) but has increased marginally from 18.4% to 18.5% in the last quarter. And the national vacancy rate has had a sharp decline from 13.31% to 8.26% (TPN Vacancy Survey 2022 Q1), however, this is still above the pre-pandemic low of 7.47% achieved in Q1 2022.

First National Bank, in the July 2022 Property Barometer announced that while still below aggregate core inflation, it expects rental inflation to “lift to over 2.0% on average in 2022, from 0.9% last year”. The bank notes that “indications of rental market strength have turned positive, and rising demand should provide further support for rental escalations and lower vacancy rates”.

The biggest challenges faced by landlords/ managing agents right now are finding quality tenants and managing the remaining tenant arrears. Just Property franchisees offer landlords tips on how to find the best tenants, how to retain them, and what processes to follow when tenants fall behind in their payments.

What processes should landlords/managing agents follow to ensure they find the best tenants?
“We meet regularly with our agents to ensure they are marketing the properties to their best ability and to assist where we can,” says Debbie Schmidt, Rental Portfolio Manager at Just Property Centurion. “During the marketing phase, we encourage them to be transparent with the owner in their regular (preferably weekly) correspondence and to offer price counselling, maintenance feedback or requirements as needed.

“This is so important. The owners deserve to achieve a fair, market-related price for their property but sometimes are not aware of what that is,” says Gary Dickinson, Rental Agent at Just Property Margate. “We then advertise on all property portals - Just Property National Website, Property 24, Private Property, Gumtree, Facebook and even local Whatsapp Groups. Make sure the pictures of the property are current and reflect what it really looks like.”