Buy-to-let property investing far outweigh its disadvantages

In the South African property sector, there is a growing interest in buy-to-let property investment right now – and this, says Tony Clarke, Managing Director of the Rawson Property Group, makes good sense because the advantages of this type of investment far outweigh its disadvantages.

Asked to list the benefits as he sees them, Clarke mentioned that:

1.    Buy-to-let properties can often be – and usually are – bought with a bank loan. This means that the investor’s rent and capital gains are based, not on the amount he has paid out to date, but on the total value of the property. His gains, therefore, are made on money that is, in reality, not yet his. By way of contrast stock exchange shares and money market products usually require full payment upfront – and are more subject to fluctuations.

2.   Buy to let properties almost always give satisfactory capital growth in the long term because housing, being a primary human need, is always in demand and there are usually stock shortages. This is an asset class which, although affected by economic swings, tends to be more resilient than others. Over any 10 year period in South Africa’s history, a minimum growth of at least 45% has been achieved.

The disadvantages to this type of investment are that, although this has not been the case in South Africa for some time now and no one expects this scenario to occur in the foreseeable future, there can be periods where tenants are in short supply and, if found, are able to negotiate ultra-low rents.

Another disadvantage is that, even in good periods, it is possible for the investor to find that he has ended up with an unreliable tenant. In these circumstances, the investor and his agent may well have to resort to expensive, time consuming legal action to obtain a satisfactory outcome – possibly even an eviction. During these drawn out proceedings, it’s probable that he will have to find his monthly mortgage bond payments without the help of regular rent income.

Unsatisfactory tenants have all too often also been known to damage properties – and reclaiming the cost of this usually proves difficult.

Buy-to-let investments, says Clarke, have to be viewed as long-term and, by the same token, investors should choose their properties on their ability to attract tenants five, ten or fifteen years down the line. Areas that are popular now, but showing signs of declining, should be avoided.

“In view of the supreme importance of location,” said Clarke, “it’s essential to identify the trends affecting the various areas, if necessary paying higher than originally budgeted to be in an up and coming area.”

“In addition,” he says, “unless the investor has in-depth property experience, it will usually pay to employ a professional agent who is remunerated with a commission of 10 or 12% of the rent each month. This relieves the landlord of on-going rent collection, tenant management, rates, services, tax payments and other possibly irksome duties. Most importantly, however, it also means that the accepted tenants’ previous leasing, credit and employment records would have been carefully checked through special organisations set up for this work. This, in turn, greatly reduces the chances of having a fly-by-night or non-paying tenant.

Another apparent drawback of property investments, one which seems to be a negative but in fact is a positive, is that property can take time to sell. Many other investments are often easier to withdraw from and enable the investor to realise quick cash assets. By contrast, the property seller has to market his property, find a buyer and wait for transfer before getting his hands on the cash. This, however, means that the property investor tends to see his investment as a forced saving and does not react too quickly to fluctuations, many of which turn out to be temporary.

The IGrow Wealth Investment Club has buy-to-let clients who have built up substantial property portfolios which often allow them to retire early.

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“One can learn a great deal from such people,” said Clarke. “The mere fact that so many of them have been successful testifies to the truth that this type of investment is suited to the man-in-the-street because it is very difficult to hide awkward, negative aspects in property – as is often the case when one is investing in less transparent asset classes where one’s involvement is less hands on.”

“In closing, property may not seem to be the best vehicle for the investor’s money but he can rest assured that over the long term it is by far the safest asset class and is capable of giving excellent returns.” – Rawson

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