Key decisions when investing in buy-to-let residential property

Advice for landlords and tenants

While there is today a greater awareness of the benefits of owning a residential property to rent out for passive income, aspirant landlords are faced with some key decisions when making this kind of investment.

Emarie Campbell, Pam Golding Properties area manager for the Cape’s Western Seaboard, explains:

“Firstly, an investor is by assumption an absent owner/landlord and not an owner occupier. There is a difference between a home owner with a freestanding home who decides to rent out their home, and an investor who, from the outset, makes purely a financial investment and has no emotional attachment to their purchase.

What kind of property to buy?

So as an investor, what kind of property should you buy? In this scenario, I strongly recommend that the investor buys a unit in a secure sectional title complex or a home in a security estate governed by a home owners association, as investment properties located in secure environments are in high demand by tenants and achieve better rentals. In the luxury market, a unit with an alternate or back-up power supply is a must. Also, unfurnished homes attract stable, long-term tenants, as furnished homes are usually rented out on short-term rentals and are seasonably vulnerable.

Security, however, is not the only benefit – in a sectional title complex, where the owner pays a levy, the body corporate and managing agent take responsibility for external building insurance, external maintenance and the gardens, while the conduct rules allow for a harmonious living environment. In a home owners association environment, the trustees and managing agents ensure that the aesthetics, external maintenance and general look and feel of the estate is upheld by the individual owners, while again, the conduct rules allow for harmonious living.

As to the size or configuration of properties to invest in, I recommend either a two-bedroom apartment of 50sqm or more with a minimum of one parking bay, and/or a three-bedroom freestanding home of around 120sqm with a double garage of about 36sqm, as these two offerings are never vacant. On the Western Seaboard these can range in price between R12 000 and R18 000 for the former and R18 000 and R25 000 for the latter.

Should you buy a new or existing property?

If you are buying a sectional title property, you cannot go wrong if you buy off-plan, in a good position and with a reputable developer. There are some older blocks with larger units that are an attractive option and you will have access to historical sales statistic in the block, which will indicate the price growth of units in the complex. Often these older buildings go through a regeneration period and if you can get in at the start of this, there is money to be made.

How many units should you buy?

How many units you invest in depends on how highly geared your purchases are, namely the amount of the mortgage in relation to the value of the property. If you are highly geared, you need to have the ability to subsidise your purchase over and above the rental income you receive, and you are also susceptible to increased interest rates in the current cycle. Bear in mind that all the expenses incurred by your investment property can be deducted from the rental income before tax is calculated, such as for example repairs and maintenance, property management fees, insurance and municipal rates and agent’s commission. If you are a cash buyer and invest in the kind of units outlined above, and have a longer-term outlook, you will have a monthly return and undoubtedly a good capital return.

Naturally, you need to ensure you have high quality tenants. A good tenant is not only defined by the amount of rent paid – it is someone who has been properly checked on Tenant Profile Network (TPN), their income and expenditure has been scrutinised, and they are comfortable to pay a double deposit. While there is a shortage of rental stock across all price ranges, tenants are however, well-informed on market related prices and reject properties that are overpriced.

Best value

Western Seaboard properties, if not on the beach or within walking distance of the beach, are just a few kilometres from the beach, which makes them highly appealing. Proximity to the beach and views of Table Mountain, Table Bay, Robben Island and just the beach in general, have a direct influence on value – the closer to the beach, the higher the purchase price – but this comes in tandem with a higher rental income.

The further away from the beach, the lower the purchase price and the more affordable the rent. Areas which stand out as providing a good balance between the two are Sunningdale, Royal Ascot and Century City. These are newer areas, and in many cases offer a secure living environment. To summarise, secure beachfront properties offer the potential for higher rental income and capital appreciation, while those further away from the beach in a secure environment, and close to amenities and good schools, offer a good rental and capital growth.

Currently, we have a shortage of rental stock, a scenario which is going to escalate. The Western Seaboard, with its proximity to Cape Town central city, Century City and the light industrial areas of Paarden Eiland and Montague Gardens, coupled with its relaxed lifestyle, schools, transport infrastructure and hospitals, is increasingly popular.

Coupled with this, development has been stinted over the past five years, firstly for economic reasons, less and less vacant land availability (other than in the Parklands, Sunningdale and Century nodes), and then the delayed impact of Covid. Added to this, due to sewerage infrastructure requirements which need to be addressed, no new development applications on the Western Seaboard will receive approval for construction prior to 2026. All this means that we are heading for an inventory shortage, making this the right time to invest.

Managing your investment property

Many investors who live in close proximity of their investment, place their own tenants and manage their own leases. Aspirant landlords with their investment in close proximity, should until such time as they have navigated the world of tenancy, appoint an agent to procure a qualified tenant, draw up the contract, and bring in the two-month deposit and first month’s rent, as well as completing the ingoing inspection. This is known as a procurement lease and a lesser fee is charged, versus a managed lease.

Absent landlords (out of suburb, province or country), are advised to appoint a reputable agent to procure a managed lease. This is at a higher fee, but includes the procurement process, the ongoing rental collection and disbursement, inspections and sourcing of quotations and effecting repairs for fair wear and tear.

Procuring an ‘A’ rated tenant is the foundation of a successful managed lease, but by no means the only obligation a rental agent has in managing a lease. We have to conduct a very thorough ‘Ingoing Inspection’ with the tenant. Any existing defects have to be noted, and any repairs that need to be effected in order for the tenant to occupy the property have to be brought to the owner’s attention and agreed to by the landlord.  Modern technology enables us to create photograph folders for each home, which can be shared with the landlord and the tenant, and which is a good reference when the tenant moves out.

Furthermore, quarterly inspections must take place to ensure that the property is maintained in the manner it was handed over. Should an agent at this time notice that a tenant is destructive within a property, steps for rectification or vacation must be implemented.

There is a finite line between a tenant damaging a property and fair wear and tear. Damage caused by a tenant must be rectified and paid for by a tenant. When a tenant exits, and depending on the length of the tenancy, landlords often have difficulty accepting that maintenance and fair wear and tear are not the tenant’s responsibility. A homeowner lives in a home they cherish. Homeowners experience wear and tear in their homes which they have to maintain in order for them to enjoy the benefits of home ownership and to ensure capital growth. It therefore follows that an investor is advised to make a provision for a maintenance budget.

Landlords should also not renew a lease without re-qualifying a tenant at a financial level. If there is one thing Covid and the current financial climate clearly demonstrates is that an individual’s income can change overnight through no fault of the individual, but puts into question their ability to service their rental commitment.  What was an ‘A’ tenant 12 months ago, can be a ‘D’ or ‘E’ today, which is why a TPN check and relook at bank statements and three months’ salary slips is a necessity.

Advice for tenants

Tenants on the other hand want to know what to look for in a good property to rent and in a landlord? To start with, a well-maintained property indicates that the landlord is invested in the property. A tenant should be handed a clean property, with plumbing, electricals, stoves, geysers, solar systems, pool equipment, irrigation, and so on fully functional. Security systems must be checked and clarity on who is responsible for the alarm service must be noted. Functional remotes for gates and garage doors as well as keys, should all be handed over to the successful tenant.

Positively, 90% of tenants pay their rent on time and abide by the conditions of the lease. Those who break the conditions of the lease do so knowingly. Occasionally a tenant holds back rent or a portion of their rent as they are not happy with the repair work being done timeously, or the condition of the property. This really is a no, as they could well be black listed on TPN as late payers or only paying part of the rent.

Tenants are advised to keep good communication lines open with the agent or landlord. They should pay their rent on time. And they should report defects immediately. They should also respect the property and abide by any rules that the Body Corporate or a HOA has in place, in the same way in which any other resident in that complex and estate would.”

For further information contact Emarie Campbell of Pam Golding Properties on 021 557 1115 or email blouberg@pamgolding.co.za.

Posted by The Know - Pam Golding Properties