Be careful to buy to rent

Even though rents are steadily rising again, with the prospect of further growth over the next few months, landlords face exorbitant municipal and maintenance costs. Photo: provided

BUSINESS


Think twice before buying a house to rent, especially if you plan to depend on it for income, experts have warned.

Even though rents are steadily rising again, with the prospect of further growth over the next few months, landlords face exorbitant municipal and maintenance costs, and there are also tenants with fluctuating incomes who are not paying not or who pay late. Your rental property could therefore become a liability rather than an asset.

Johan Reyneke, rental property owner in and around Johannesburg, says:

If you ask me if it’s worth renting a property, I’d say it depends on whether you’re a big rental company or just a little guy. Because if you’re little and you have to take care of everything yourself, you’ll get yourself years of trouble.

Since 2017, Reyneke has rented buildings in Berea, Hillbrow, Turffontein and Lombardy East. The Covid-19 pandemic cost him nearly R400,000 in rent.

“People who owed me months of rent because they supposedly couldn’t work left overnight,” he says.

Carel de Wit, CEO of Indluplace Properties, a company that rents out apartments in Gauteng, says there have been major shifts in the rental market that have made it a volatile business environment.

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“We rent to working families who have been under a lot of pressure. Many people have moved. »

The apartment vacancy rate has improved slightly, from a high of 13.1% at the end of 2020 to an average of 8.8% in the second quarter of this year. However, the apartment vacancy rate is still well above the 5.3% average recorded between 2017 and 2019, said Kobus Lamprecht, head of publications and research at property consultants Rode and Associates. latest report on the state of property in South Africa.

The rental market has been hit hard by the pandemic, and tenants who usually paid their rent on time became defaulters overnight. It recovered when people were able to return to work after the most stringent lockdown measures were relaxed, but even that figure is not yet at the level it was before the pandemic.

Residential figures from credit bureau TPN show the number of tenants with up-to-date rents fell from 81.4% in the fourth quarter of last year to 80.78% in the first quarter of this year.

TPN attributes this to the financial pressures facing South Africans, including food price inflation and record fuel prices. According to TPN, rents rose 1.93% in the first quarter of the year and are expected to rise further for the rest of the year as inflation forces landlords to cover costs. It is therefore difficult to find a balance between a decent rental income and an occupation.

The office warns that landlords will have to realize that it could become difficult to secure rent on time in the future.

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FNB real estate economist John Loos expects rental income to rise over the year to keep pace with consumer inflation. Indeed, the demand for rental properties generally increases as interest rates rise.

Additionally, no new rental properties are being added to the market as the type of housing purchased to be rented has decreased significantly.

In the latest FNB survey of real estate agents, only 6% of properties are bought to be rented, says Loos.

“In the boom period around 2004, rental buyers were up 25%.”

The ETF expects the SA Reserve Bank to raise interest rates an additional 1.25 percentage points this year, and half a percentage point next year, so the prime rate will eventually rise to 10%.

This is holding back real estate purchases, as households have become much more sensitive to interest rate hikes in a context of high inflation.

Much of the rental property buyer’s market is taking out mortgages and will therefore be put off by higher interest rates, Loos said.

So, although the rental market is recovering due to higher demand and limited supply, the extent to which landlords will earn higher rents will be limited as consumers are under pressure.

Angela Rivers, chief executive of the Johannesburg Property Owners and Managers Association, which represents inner city building owners and managers, says the vacancy rate in Johannesburg is significantly higher than the national average.

According to the Rode report, it was the second highest in the country at 10.1% in the second quarter of the year. The highest vacancy rate is in Durban, where it is 14%.

The rise in vacancy rates in the Johannesburg Metro over the past 14 years has been well above the rate of inflation, making things difficult for tenants and landlords. Between 2008 and this year, city council levies on services such as electricity, water, waste removal and sewerage have risen far in excess of increases in household incomes. The increases totaled 385% over a 14-year period, compared to household income, which increased by 119%. Landlords have no choice but to pass on some of the rate increases to tenants.

Rivers said:

Many people from lower income groups are leaving the city center because they can no longer afford these fare increases. They move to informal settlements, where public services are free. And if everyone leaves downtown Johannesburg, it will eventually be a slum.


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