How to be a buy-to-let investor in today’s economy

by David de Waal on August 20, 2014 0 comments

In FNB’s latest estate agent survey, the percentage of investors buying for investment purposes has increased in the first quarter of 2014 to 9%, from 8% in the previous quarter.  This is still far below the peak of around 25% in 2004 – but now could be the right time to get back into the market as a buy-to-let investor.

So what should you consider before taking the plunge?

1) Make a business decision

Buy a property that makes financial sense as an investment, not one that you love yourself.  Your property is the product, so make it something that your target market finds attractive.

A secure townhouse in a well-managed complex that is close to schools and employment is always going to be appealing to tenants so focus on finding these types of opportunities.

2) Rental yields and cash flows

Rental yields are about 5-6% on purchase price on average, but can be as high as 7-10% where stock levels are low.  Before investing, ensure that you have done your sums and will know what your net cash flow position will be each month.

Your cash inflows will be the rent received and your outflows will be the bond repayments, levies, rates & taxes and maintenance.  If your rental income is below your monthly outflows then you will need to top-up with extra cash from your savings.  And remember to consider the possibility that you won’t have tenants all the time, and so will have to fund your investment for the period that the property is vacant.

3) Direction of property prices

In metropolitan areas the prices of properties have increased at levels above inflation recently. But the economy is still sluggish and interest rates are on an upward trend.  This suggests that any continued property boom is not really sustainable in the short-term . Your focus should not be on trying to make a quick buck by buying and hoping to sell again quickly at a profit.  Rather take a long-term view and concentrate on maximising the rental income you can earn.

4) Screen tenants

In SA it can be costly and time consuming to evict tenants who can’t or won’t pay. Credit bureau Tenant Profile Network states that the final quarter of 2013 witnessed a “worrisome change in tenant payment behaviour for the first time in nearly three years”. The message is clear: it is very important to thoroughly screen any potential tenants before they move in to make sure they can afford the rental and are of good character.

David de Waal (CA(SA))
CEO
Steeple – Low cost estate agents

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