Is it still worth investing in rental property?
Category Rentals
The rental market faced significant challenges during the 2-year pandemic period which left many landlords out of pocket and wondering whether investing in buy-to-let is still a profitable investment.
Like the economy, the rental market comes under strain during a downturn, and it similarly fluctuates, going through peaks and troughs. An important difference is that property is a long-term investment and unlike most other investment classes, while your rental income may not be quite as high as during an economic boom, the asset generally retains its capital value.
Based on historical house price growth data going back to the 1980s, rental properties (in the right locations and priced correctly) have enjoyed excellent growth and income streams. An important provision is that the property must be fit for purpose to avoid the risks associated with the property standing vacant.
Not all properties are suitable for the rental market. To minimise the risks associated with rental investments, consider these important prerequisites:
* Invest in an area where there is proven demand for rental properties. Ensure the level of demand and price points are adequate to meet your desired rental income and returns.
* Ensure you invest in the right type of accommodation which is most in demand. Take emotion out of the transactions and look beyond what you may like and consider what most people would want.
* Pricing in line with current rental rates will ensure you can attract tenants. The higher the desired rental, the fewer tenants you would be able to attract compared to popular price tiers.
* Working with a credible local rental agent is also vital for thorough tenant vetting to ensure consistent income and preservation of the condition of your property asset.
* You should also investigate the rental yields in the area and assess whether this would meet your desired investment returns. Bear in mind that the yield will fluctuate depending on the market cycle.
* Ensure careful tenant management is in place so that appropriate action can be taken in the event of financial distress (such as the unexpected pandemic) to minimize losses and retain good tenants.
* You will also need to ensure it is managed and maintained so that it can continue growing in value and delivering the required rental returns.
Property is a long-term investment and the longer you have it, the higher the return that you are likely to earn, especially once it is paid in full.
From a demand perspective, the rise in urbanisation combined with the trend of semigration to the greater Cape Town metro area continues to drive strong demand for rental property. During economic growth periods, many landlords achieved rental returns well above the market average.
Rental property is therefore a good investment, provided it meets the necessary criteria to keep it occupied and earning a steady rental income. The market has now largely recovered, but it remains vital that you do your due diligence and ensure that you invest correctly for the market and can achieve the desired investment returns.
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Author: Gina Meintjes
