How to take advantage of a buoyant rental market
High unemployment figures, high inflation, rising interest rates and uncertainty ahead of next year’s general election, have all contributed to the flattening of South Africa’s economy but also to the home rental market bouncing back to pre-covid levels. “The cost of buying and owning a house has become prohibitive for many South Africans, creating a challenging house buying and selling environment. This has had the effect of strengthening the rental market, which for existing homeowners and investors can be a reliable source of additional income,” says Andrea Tucker, Director of MortgageMe.
Turn a liability into an asset
With as many as 54% of South Africans across all age groups saying they are renting simply because they cannot afford to buy, turning what may seem like an unsellable liability into an income-generating asset is an attractive option for existing homeowners. In addition, a strong ‘buyers’ market’ can provide new, prospective purchasers with good opportunities in the buy-to-rent property market.
“If a homeowner is struggling to sell and doesn’t want or need to let the property go when prices are low like they are in many areas at the moment, renting that property out can add an income stream to cover bond repayments and possibly more if one is lucky,” says Tucker.
How to attract and retain a tenant
With such a strong demand for rentals, combined with a lot of available stock, landlords must work hard to attract and retain tenants. Before becoming a landlord, it’s worth looking at the market in your area and who your prospective tenant may be. Do you have off-street parking or a garage? If it’s a family home, is the property pet friendly? Is the yard safe and secure for children and animals? Are there schools nearby? Is it close to a business district that employs a range of salaried people?
“With the ever-present reality of loadshedding, if you can afford to invest in alternative energy sources for the property, it will stand out from other homes that have no inverter or solar power. The investment is likely to pay itself off with the calibre of prospective tenant you’re attracting with something as simple as a gas hob, or small wired in inverter connected to solar panels (consider the rental options for these). Also, with the introduction by many employers of the hybrid working model post covid, you could look at increasing the rental value of your property by converting spaces such as an outhouse or garage into a work-from-home office with reliable Wi-Fi. But getting a property ready for rental can be costly and any expenditure should be factored into your income and outgoings balance sheet,” Tucker explains. “Consider and research your options, and if you’re the creative type, use this to your advantage when it comes to more affordable ways of solving for these problems.”
Buy to rent, buy to own
Although South Africa has the smallest differential between rent and bond costs in the world (Renting vs Buying | Compare the Market) there are nevertheless a number of ancillary costs to be taken into consideration when buying a property as well as pros and cons to buying to rent, buying to own and simply to renting as an option.
Tucker says the administration costs of a house purchase can amount to around 8% of the registered bond amount. Fluctuating interest rates make bond repayments variable unless you can negotiate a fixed rate from your bank. Landlords are responsible for the upkeep and maintenance of the property, and even if you have building insurance to help with items such as geysers and the roof, you must still pay the premiums to keep you covered. Property rates and taxes are the homeowner’s/landlord’s responsibility although tenants are generally expected to cover their own water and electricity consumption. “If you can afford to buy, a house should be a long-term investment that, with patience, will pay dividends in the long run,” she adds.
To rent or to buy?
The downside of renting includes being subject to the landlord’s own plans for the building – even with a lease agreement, they may give notice to vacate at any time (especially if the property is still for sale, despite having a tenant in place). Advice to prospective landlords is to be open with tenants about their plans for the property and ensure the lease in place is beneficial to both parties. Conversely, renting gives the tenant the same flexibility to give notice when they need to, for example, if a job is temporary, or a relocation is on the cards. If you are in a new job in a new city, you may want to try living in a few suburbs before deciding where to buy. And with your rent fixed for the duration of the lease, you at least have the security knowing what your monthly outgoings are.
“Renting versus buying is a perennial question, whatever the economic climate of the country,” says Tucker. “Existing owners and new buyers should look very carefully at what they can afford in both the short and long term before making any decisions.”
Ultimately, buying to rent can be lucrative, but is not without possible pitfalls. Renting may feel like a temporary existence, but offers flexibility and the opportunity to save for your own place.
“Whether you are buying to rent or buying for your own use, always weigh up your own finances and circumstances as well as those of the prevailing market and area before making a final decision,” advises Tucker.