Navigating the buy-to-let boom: Property investment 101

Source: Supplied. Grant Smee, managing director of Only Realty Holdings.

“The impact of the buy-to-let frenzy is especially evident in the Western Cape where rental vacancies recently reached a record low of 3.18%,” shares Grant Smee, managing director of Only Realty Holdings. “The same report cites that investment properties contributed a whopping 31.1% of all applications processed in the region.”

However, while demand has skyrocketed, Smee shares that not all investment properties will deliver “astonishing rental returns”.

“Property investment can be a successful wealth-creation strategy, but it can also be a costly and time-consuming mistake if you rush into it and don’t do your homework.”

The rules of property investment

Some of the guidelines for property management:

• Determine your strategy and goals: “Do your due diligence and educate yourself. Rather than listening to various sources, find a trustworthy source of information and stick to your plan. Know your ‘why’,” says Smee. “If you are purely investing for quick gains, then the property market might not be for you. We need to take a long-term view to the market and be realistic about our returns.”
• Things change: “It’s important to continuously revisit your goals and strategies. As we grow older, our appetite for risk changes, as does our financial independence.”
• Negotiation: “When negotiating, factor in every cost. South Africa’s levies are some of the highest in the world. Interest rates will change and so will the economic climate. Insurance is needed, bond and transfer costs are to be factored in and even the cost of eviction. Eviction is an expensive and laborious process so be sure to factor in a monthly fee using a trusted service provider,” he adds.
Smee shares that above all else, one must be objective when it comes to selecting an investment property. “So often people pay more because they are invested in the property and have an emotional connection to it. This could stand to lose you a lot of money in the long run.”

Selecting the best property for you

The key to ensuring a profitable investment property comes down to two factors:

“Begin by researching the vacancy levels - not just of the city - but specifically of the neighbourhood where you plan to invest. It's crucial to study both current and historical (three to five years) keeping in mind that vacancy rates in some areas may be in a temporary bubble that doesn't accurately reflect true demand.”

You can find this information by researching the Payprop Rental Index or consulting with an experienced local estate agent.

“Once you have a clear understanding, you can then assess whether the property will appeal to your target market,” continues Smee.

If you’re looking to appeal to young working professionals (Gen Zs and millennials), Smee advises that you look for a property that spells convenience. “Look for properties that are easy to maintain, are conveniently located near to major transport routes, shopping centres, gyms, eateries and more. This generation prioritises convenience and lifestyle above all else.”

Similarly, if you are targeting young families, then Smee suggests looking for a property in proximity to good schools, hospitals and retail centres. “Put yourself in the shoes of your target market.”

Additional factors to consider when choosing your investment property include:

• The crime levels in the area.
• The property’s condition.
• Rental law and insurance.
• Whether you plan to rent it furnished or unfurnished.
• Whether this is a long- or short-term investment strategy.

Maximising the profitability of your investment

Rental prices in South Africa are highly dependent on location - varying widely from province to province. According to the latest PayProp Rental Index, the Northwest has the lowest average rent in the country at R6,301 while the Western Cape boasts the highest at R10,300.

“One thing to keep in mind is your breakeven point to maximise your profitability,” he adds. “Sadly, if you are bonding a home on a 100% bond for instance, you will most likely not break even if you’re simply renting out over a year’s lease period.”

Beyond traditional financing, investment may require one to look to non-traditional avenues to yield returns, these include:

• Partnerships: “Here, you come to a written, structured agreement with a partner to cover the costs of your investment. This should generally be a short-term investment or ‘flip’.”
• Structured finance: “This is commonly used for investors with a portfolio. Investors receive a lending facility from a private bank and their property portfolio is looked after as a whole.”
• Joint ventures: “This is best for parties who have different things to bring to the table, for instance, one might bring expertise while the other brings finance.”
• Family investors and angel investors: “For those who need help, structuring a deal with your family or an outside investor (angel investor) is an option.”
Smee shares that investors can further maximise their profitability by investigating the tax-deductible costs of the rental property. “This differs based on whether the investment is in a freehold property or a sectional-title unit, but in the case of freehold properties, costs like levies, repairs, maintenance and insurance premiums are tax deductible.”

Short versus long-term rentals

Another way to maximise the profitability of your rental property is by going the route of short-term letting, which can generate as much as 30% more income than long-term leases especially in high-demand tourism destinations like Cape Town.

“Keep in mind that this option may be lucrative but is significantly more labour and time intensive than long-term leasing,” says Smee. “Hiring a property management company can mitigate this, but often carries a hefty fee in addition to the higher operating costs of regular cleaning and maintenance fees, as well as the risk of hosting unvetted short-term tenants.”

He concludes saying that short-term rental demand can also fluctuate based on the season, potentially leading to extended vacancy periods and difficulties maintaining a consistent cash flow.