BEST INVEST - BUYING TO LET?

Invest in the stock exchange, or in property with a view to letting it out? Myles Wakefield, CEO of Wakefields Real Estate, has a persuasive argument for investing in a buy-to-let property.

“More and more financial advisors and stockbrokers are overheard saying they’re finding it increasingly difficult to find value on the Johannesburg stock exchange,” says Myles Wakefield, CEO of Wakefields Real Estate. “Since the market fell quite substantially - the global recession in 2007/8 - the stock market has done incredibly well, but not only has it gone up in nominal terms, but also in terms of valuation where they often look at it on a price earnings ratio – they talk about the whole market on a price earnings ratio. That means you pay X number of rands for one rand of earnings…and that number has swelled quite substantially.” 

In short, by saying it’s increasingly difficult to find value on the stock exchange, the word is it’s looking a little top heavy, and could be in for a correction. As Wakefield says, “We don’t know how much or even if or when it could happen – five, ten, or even more percent? – but when valuations are on the heavy side, the odds are not as stacked in your favour as when they’re on  the low end – which they’ve been since the financial crisis.” 

The general opinion is the stock market seems to be a lot more expensive than it has been. What could tip it? A rise in interest rates, weakening of the rand, some external shock? It’s not an exact science, and nobody has the answer, but it does beg the question…’Where else could we put our money?’ Should we be looking at investing in residential property as an asset class if we’re not doing so already?

Wakefield acknowledges of course, that some will counter the property versus stock market claim by saying an increase in interest rates would hurt the residential property market, but, he believes, “buying-to-let is a different animal, in that a big portion of your return is made up of the actual rentals. That rental yield is sitting at 8 percent in many instances right now, and if that number grows consistently with inflation every year, you have a very good starting point for your residential property investment.”

On top of that, there’s capital growth. Sure, it’s likely to be better one year than the next, but with a medium to long-term view, the property is going to be worth more money in years to come than it is today. In addition, says Wakefield, “If you use leverage in the right way – in other words, using rental to pay off your bond – you’re unlikely to be in any stressful situation if interest rates do rise.” 

Wakefield suggests that new investors should be sensible: “Always take a more conservative view, especially in the early years when you’re more susceptible to interest rate increases.  We are seeing a massive demand by tenants for property – all of Wakefields’ branches report stock shortages - so if you do your homework well by assessing where and what the demand is, it’ll be highly unlikely you’ll be short of a tenant,” says Wakefield. “With low interest rates and high demand for lettable accommodation, it’s a pretty compelling argument for investing in property. Nobody’s suggesting you move all your money from one to the other, but from a diversification perspective, do you have a buy-to-let property in your portfolio? And if not, in the light of the stock market possibly being overvalued, you might want to think about it.”

HOW TO MAKE IT WORK 

I buy a R700 000 two-bedroomed flat on Durban’s Berea, and put down a 10 percent deposit. Based on rentals being asked currently, the tenant’s rent should cover my levy, my rates, and my bond. All I invested was R70 000.  If the cash flow is positive, the capital growth received on your investment will be ‘the gravy’.

The secret is simple. Select the right property in the right area at the right price…and ensure you have a fully vetted tenant. 

Be cash-flow positive from day one. Make sure you have at least a 10 percent deposit. If you have to feed the bond/levy/rates, it’s not a good investment. If the interest rate increases, you will find yourself in stressful circumstances, and in some instances, be forced to sell at the wrong time for less than you should have - poor investment. 

Make sure that the rental - the yield - on that property is sufficient to cover your levy, your possible repairs and maintenance, and your bond repayment.

DO YOUR HOMEWORK 

Don’t make an emotional purchase. Buy where the tenants are, and buy what they’re looking for, and you’ll always have a demand for your apartment. 
Treat this investment as you would any other. Investigate, do your homework. That way, you’ll be able to get your inflation - or above inflation – escalation in rental every year. Just as you would a dividend. 

With those rental escalations, the tenant starts paying off your property for you. He’s paying off your debt. For R70 000 on a R700 000 property, your tenant pays the balance (and interest) of the R630 000 for you. Over time, you end up with an asset that’s paid off completely. 

Wakefield says, “I think it’s all about the yield in relation to the interest rate. That’s the differentiator as to whether property is expensive or not. And right now, they’re very, very similar. Interest rates are 9,25 percent - you might well be in a position to get a reduction on the prime interest rate - the yields are coming up there or thereabouts. There have been times in the past where the yields are going to be half of that. You could then argue that property is expensive, but right now, not necessarily the case.” 

There’s something solid and tangible about property ownership, and for many, it’s a satisfying investment. Something with which they’re comfortable, and indeed, over which they feel they have control. Some have a portfolio of properties, others just want a single property. You’ll possibly hear the counter-argument to a buy-to-let scenario of ‘you don’t want a call in the middle of the night to say your geyser’s burst’ – and although that’s the stuff of urban legends (yes, it can happen…but not often), if you prefer to have your investments at arm’s length, there are ways to do that too. Hand it over to a property management team – it’ll eat into your return slightly, but save you any hassles.” 

PROPERTY INVESTMENT IS SIMPLE

It is really. The information is so readily available. And if one property works for you, you might find yourself adding to it and creating a substantial portfolio. 

Yes, you pay tax on the rental on a paid up property, but if you use gearing, you can box smart with that. 

And, to the comment about the risks associated with errant tenants, deal with a reputable rental division. We, at Wakefields, have a stringent tenant evaluation process – financial and personal – so landlords can feel at ease. This aspect of the buy-to-let process is best managed by the professionals.