Rising prospects for buy-to-let investors

As interest rates continue to increase in the coming months, home sales numbers can be expected to fall off due to declining affordability, while the demand for rental homes steadily increases.

"And this should boost investor interest in buy-to-let home purchases," says Gerhard Kotzé, MD of the RealNet estate agency group, who notes that with its fast urbanizing population*, South Africa is in great need of good quality rental accommodation in its major cities.

"This need is being addressed to some extent currently by the conversion of vacant office blocks into residential units, but there is still plenty of room for private investors who want to build up a portfolio of buy-to-let properties."

According to First National Bank, such investors accounted for 11% of all home purchases in the first quarter of this year, up from 10% of purchases in the same period of 2021, despite the relatively low demand for rental properties over the past two years and the restricted potential for rental escalations due to the rising cost of living.

"And in our experience, the reason for this is that astute investors are taking advantage of the oversupply of rental units to purchase now at excellent prices in anticipation of a relatively steep rise in demand over the next year or two."

Nevertheless, he says, they do need to be very aware of the factors that could affect the future vacancy rate of their rental units.

"Obviously there are very few rental properties that will be occupied 100% of the time, and most seasoned investors build an average 5% vacancy rate into their calculations. But that rate can vary considerably - and make all the difference between a good and bad investment in the medium to long-term."

Kotzé says the first thing to research in this regard is the current availability and rate of provision of rental property in an area you are considering, and the likely future demand, perhaps due to the creation of new work opportunities.

"If the local population is expanding faster than the number of rental units being provided to meet demand, the vacancy rate per unit will be lower and higher rents will become possible. This is likely to be true in areas close to new manufacturing, mining or infrastructure projects, for exmaple. On the other hand, it may not be the best idea to buy in an area where there are many new residential developments under construction, because you are soon likely to have lots of competition from other buy-to-let investors."

The second factor to consider, he says, is the position of a rental property within a particular area. "Drive-by traffic generates many rental leads while the hard-to-find property is likely to stay vacant for longer. Potential tenants usually also prefer properties that are close to schools, shopping centres, public transport and arterial roads."

Kotzé notes that the condition of a property can also have a significant impact on the vacancy rate. "Tenants don't only move because of life changes such as a new job or a new baby. Rental homes need to be well-maintained, especially in the current market, or any rental increase you propose is likely to prompt a move to a newer or better-managed property - leaving you with a vacant unit that will in all likelihood have to be cleaned, painted and repaired anyway to attract a new tenant."

*According to World Bank statistics, almost 68% of SA's population already lives in urban centres, and this percentage is expected to rise to at least 71% by 2030.