In South Africa, with its rapidly growing middle class, strong urbanization trend and a staggering housing backlog, the opportunities for residential buy-to- let investors are phenomenal. The Finance and Fiscal Commission (FFC) estimates that it will require R800 billion – and a “miracle” – to clear the housing backlog of 2.1 million houses.
The imbalance between the growing demand for housing and the fast dwindling supply, which has all but grinded to a halt thanks to the banks’ stringent lending criteria and the enormous challenges faced by residential property investors, has ensured that rentals have increased steadily and rental stock shortages are evident across the country.
Over the last 10 years, thousands of investors have taken advantage of this opportunity, which shows no signs of abating. Using a tried-and- tested system, which has been used by the world’s wealthiest for generations to create real wealth, they steadily and responsibly been building small but highly profitable portfolios of well-selected and well-managed buy- to-let properties. These portfolios are producing not only ongoing, passive, inflation-linked income year after year, but also ongoing capital growth, resulting in exceptional returns on investment.
The Benefits of Buy-to-Let
According to Paul Stevens, CEO of Just Proprty, the benefits of a buy-to- let scheme far outweigh any potential pitfalls. “There is a growing interest in the local property industry in buy-to- let property investments, which makes sense as the advantages of buy-to- let far outweigh any issues that may arise. Low interest rates, rising rents and recovering house prices have made the last few years very profitable indeed for many landlords.”
Buy-to- let properties are usually bought with loans from the bank. This means that both the investor’s rent and capital gains are based on the total value of the property and not on the amount paid out to date. The gain on the investment is made on money that is, in reality, not yet his. By way of contrast stock exchange shares and money market products usually require full payment upfront – and are more subject to fluctuations.
“Buy-to- let properties almost always give satisfactory capital growth in the long term because housing, being a primary human need, is always in demand and there are usually stock shortages. This is an asset class, which, although affected by economic swings, tends to be more resilient than others. Over any 10-year period in South Africa’s history, a minimum growth of at least 45% has been achieved,” concludes Stevens.
Over a long term period, buy-to- let is by far one of the safest asset classes and is capable of giving the investor excellent returns.
Just Property’s Tips for Buy-to- Let Success:
– Buy the type of property that is most “lettable”.
– Two-bedroom houses and flats are ever popular and appeal to the widest range of potential tenants, especially those who are finding it tough to get on to the property ladder. Avoid large family homes, which appeal to fewer potential tenants.
– Don’t restrict yourself to your own immediate area.
– Don’t restrict yourself to your own immediate area but research others nearby, where the rental yields may be markedly better.
– Make sure the area has a healthy market for tenants.
– Convenience is a useful factor. Being within walking distance of shops, railway stations, the town centre and so on will ensure that your property is high on the list of desirable places to live for tenants.
– Using a mortgage makes your money work harder.
– Whether to go interest-only or repayment is a personal decision, but a rental income high enough to cover a repayment mortgage is a good indicator that you are getting things right.
– Take out a fixed rate if you are uncomfortable about the chances of interest rates rising, although you will pay a premium.