Is buy-to-let property still a good investment?

Buy-to-let activity in many of Cape Town’s suburbs has now reached a higher level than ever before.

This is according to Rowan Alexander, Director of the Alexander Swart Property Group, who says there has been a remarkable turnaround in this sphere over the last five years and, as a result of this, in many Cape Town suburbs 15% or more of the buyers are buying as an investment, not to live there themselves.

He says during the 2007/2008 recession, many Capetonians found that they had overpaid for property in the boom times that preceded the downturn. This, coupled with high interest rates that prevailed temporarily, meant that the returns they were able to get were often very unsatisfactory and buy-to-let lost favour.

The pessimistic view of this asset class lasted until about 2011, says Alexander, but from 2012 investors in this market began to see steady growth which has continued ever since.

In their six years at the Rawson Property Group’s Brackenfell Rosslyn franchise, Alexander says they sold at least 200 homes to buy-to-let investors and they continue to cultivate this market today because ‘it has everything going for it’.

“However you measure it, buy-to-let investors today are on a very good wicket, and we encourage such buyers to find 20% of the purchase price at the outset which means they then only have to get a bond for the remaining 80%,” says Alexander.

“If they go this route they are generally covering their bonds and getting a positive cash flow from day one, and in addition, they are seeing a steady increase in the value of their asset – in our areas at around 10.2% per annum.”

Alexander takes as an example a typical Brackenfell home bought two years ago for a list price of R1.5 million. If bought with an 80% bond, the buyer would be paying off R1.2 million, however, already only two years down the line his property would be worth between R1.8 million and R1.85 million. This means that his investment has grown in 24 months by R300 000 to R350 000 – and as this has been achieved on initial payments of only R300 000, his ‘profit’ is already 100%.

“This is the great advantage of buy-to-let property, as it is one of the very few investments that enable the buyer to make a satisfactory profit on bank loaned money. Furthermore, the investor will after two years of rising rents probably not only be covering his bond but have an extra R1 500 income per month, which he can use for other purposes or pay into the bond,” says Alexander.

He says those looking to enter the buy-to-let arena should focus as much as possible on the price ranges where the demand is strongest. At present, across South Africa, the strongest demand is for homes below R2 million, and in the R650 000 to R2 million bracket homes are snapped up by tenants.

But what about repairs and maintenance? And what about tenants who default? Surely these factors can impinge disastrously on any buy-to-let owner’s cash flow?

“Obviously such factors can be a nuisance, but there is a safeguard: we encourage investors to take out access bonds. This enables them to draw on the capital that has already accrued if they need funds for repairs or to cover the shortfall caused by the defaulting tenant, and it enables them to do this without dipping into their other savings or their cheque account.”

And what about those potential investors who would like to be in property but cannot put down any deposit or perhaps have only 10%?

Alexander says it is still worthwhile for such people to take the plunge, the only difference being that initially they will be paying more into their bond each month and are likely to see no positive cash flow for two to three years. Thereafter they will be in much the same satisfactory position as other investors.

According to Alexander, a further advantage of buy-to-let is that it is ‘simple and direct’. The buyer is not working through the ranks of possibly anonymous investment professionals who are passing his money onto companies about which he may know very little, but instead he can see, touch and enter his asset which, to repeat the well-worn cliché, is and will remain ‘as safe as houses’.