Silver Linings Property Playbook - Part 2

On the 21st May 2020, the South African Reserve Bank cut the prime lending rate by 50 basis points to 7.25%. The cost of financing a property has not been this low since the 1970's.

The rate cut, coupled with the current market conditions; as detailed in our previous article, creates the perfect environment to buy property.

This is even more so the case for investors looking at rental return property. Macro-economic factors such as banks tightening up on lending criteria, decreased household income and households cutting back on expenditure will create a buoyant rental market. We have detailed a simple strategy for any potential investor below.

Investment property strategy

• Look for a property that you could see yourself living in. If you like it then there is a strong possibility that potential tenants will also like it. Secondly, as the COVID-19 lockdown has proven, anything can happen, so you may need to move into it at some point.

• You should be looking at a middle range property between R850,000 and R1,500,000, that would appeal to tenants paying between R7000 - R12,000 per month. This bracket, according to TPN*, is the best performing rental payment profile, meaning a high probability of on-time rental payments. In addition, the latest FNB Property Insights, indicate this will be the least affected bracket by the expected COVID-19 economic downturn.

• Choose a property in a secure estate or complex ideally located near an economic HUB and close to major road interchanges and routes. Being in an area where a high proportion of the population is gainfully employed is important. The middle-income range tenant seeks convenience and security above all else.

• Buy  a development unit as they are low maintenance. There is a snag period, where the developer is obliged to fix patent defects i.e. cracked tiles, broken hinges etc. The 5-year NHBRC** warranty against latent defect i.e. water ingress and structural cracks applies to new buildings. Development prices generally do no attract Transfer Duty meaning less upfront cash is required. In the current market Developers will be seeking the comfort of sales, therefore will be open to offers.

If you tick all the above boxes, in the current market you will be looking at an 8 - 11 % gross rental return. This means the rental income should cover most, if not all, your bond repayments at the current rates. This coupled with capital gain will give you an excellent return on investment.

* The TPN Credit Bureau is the largest property specific credit bureau.

** The National Home Builders Regulation Council was created by the Housing Consumer Protection Measures Act in 1998, with the purpose of protection of the interests of persons occupying buildings, as well as the regulation of the home building industry.