It would be easy to assume that the market for rentals is experiencing a boom as a result of numerous factors.
Thus, other than adopting a radical shift in living standards, rentals are the obvious choice for many people in order to maintain their current lifestyle.
Additionally, those that have to readjust their finances and consolidate their burgeoning debt are turning to rentals as a short-term solution while they 'get back on their feet'.
Which means it's the perfect time for those with a bit of extra cash to buy a property to rent, right? Not necessarily, and it really depends on the price bracket you're aiming at.
The biggest demand is for properties in the R4 500 to R6 000 range, for which you're able to secure a reasonable three-bedroom family home in a modest area. Typically this equates to a property valued at close to R1-million and a repayment on a 100-percent bond of around R10 000 per month – hence its lack of affordability for many people.
We have lots of customers looking for rentals in this bracket, and the moment they come onto our books they're taken.
Which is great news for those looking to invest, but you need to look at the bigger picture. If you're taking out a 100-percent bond to pay for the property, the rental simply won't come close to covering your bond repayments.
The counterpoint may be that the high demand at this level is driving rental prices up, but rentals are only increasing at a rate of around 10 percent currently, which means you would have to take the pinch for a very long time before you just break even.
It's also important to keep in mind that the interest rates have dropped by six percent since late 2008, which means that the entry barrier for buyers has come down significantly. Not only has this empowered people financially to re-enter the market, but it has contributed dramatically towards much greater levels of positive sentiment towards purchases in general.
Although a mere 0,5-percent rate cut has a relatively small impact on spending power, it's important not to underestimate that the positive mindset it creates is what drives major financial decisions, such as buying a house.
By all expectations we're reaching the bottom of the rate cut cycle, with the prime lending rate currently pegged at 9,5 percent, and indications are that it may remain at this level for the balance of the year. However a further cut – with some economists arguing that as much as another 100 basis points is possible due to the slow economic recovery – could change the purchasing and rental landscape significantly.
If you're in the fortunate position of only requiring a partial bond for the additional property, or being able to pay for it outright, then in the long-term it's a fantastic investment.
At the opposite end of the spectrum, where there was previously strong demand for rentals at the upper end of the market, this has simply vanished.
Just two years ago big companies were happy to fork out R18 000 a month for a luxury property for its top executives, but now we can't find tenants at half that price.
And with all manner of financial decisions under increasingly close scrutiny, it's unlikely that this segment will recover any time soon. So if you were hoping to cash in on big-spending corporates, that ship has long since sailed.
Ultimately, buy-to-rent is a viable option if you purchase wisely in the high-demand areas. Seek advice from respected and knowledgeable estate agents in the area, and use the property guides to compare what's available in the local rental market.
If you do the homework it can turn out to be a valuable asset. If not, it could turn out to be a crippling burden. - Jaco Rademeyer
For more information contact Jaco Rademeyer on 041 367 1151 or send an email.
*Jaco Rademeyer is the owner and principal of Jaco Rademeyer Estates in Port Elizabeth, and is the NedBank Property Professional of the Year for 2010. He obtained an LLB from Stellenbosch University with a special focus on contract law, and is a multiple Institute of Estate Agents award winner.
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