PART 2: Investing in rental properties: what is happening in this market in 2021?

My clients know that at NFS, we preach the diversification of investments. Apart from the traditional asset classes used by Financial Advisers, we add residential property to most investment portfolios.

In PART 1 in this two-part series, we spoke about the economy’s glum outlook. (We saw its weakest performance since 2009 and it is expected to shrink by as much as 6.4% during 2021). It could make it difficult to find value and growth in the short term.

In 2019, houses sold for less than asking price and took longer to sell. Towards the end of 2020 and the beginning of 2021 a confluence of economic factors (low lending rate, low inflation and buyer’s market) made it possible for many in the R 2 million markets to get a foot in the door.

Many people may have been wondering if this is the opportune time to put themselves in debt and buy a property for investment purposes. For those who already have rental properties, the question becomes this: with all the economic insecurity people from all walks of life face, is using real estate as a form of passive income still a reliable investment?

Is entering the rental market your only investment option for great returns?

Investors with cash to invest have a number of options at this time:

  1. Use the money to purchase a property to rent out
  1. Give it to the bank to put in a Money Market account
  1. Buy shares somewhere in the world

A simplistic question would be, which will give you a better return in the long term?

For me the better question would be how are you spreading your investment through the different asset classes?

Essentially, we are talking about long-term investment activities. To look at the property market trends over one year – particularly if your reference point is that Year of Three Blurred and Dry Months known as 2020 – and make your long-term decisions based on this seems unwise.

Is the rental market the fattened cow you sorely need?

It is easy to be put off by looking at statistics. There may not be anything intrinsically wrong with the statistics themselves, but they may only give you a short or medium-term picture.

Gerhard Kotzé, managing director of the RealNet estate agency group, takes the short-term view that the rental market is not likely to show major growth. He believes it is due to the current combination of high vacancy rates and economic pressures on tenants.

PayProp in its latest rental index shows that in the third quarter of 2020, a downward trend in the rental market can be seen. Predictably, the hard lockdown period and the SA economy’s downgrading to junk status were the primary drivers.

The question is when will the property market strengthen? The good news is that Estate Agents have already noticed a considerable improvement.

Is this the time to invest?

At NFS, we believe this is the time to move forward.

However – and this is very important – we guard against overreaching in terms of investments, especially if these are funded by debt.

In preparing our clients to invest, we have a specific strategy. We help our clients to:

  • Invest in property as a long-term strategy
  • Build up an emergency fund equal to a few months of their current, overall expenditure
  • Ensure that they can pay 20% of the deposit on the new property out of hand
  • Diversify their asset classes so that they are protected against a number of risks

What can existing landlords do?

  • Enlist the help of a professional rental agent – they often have built up a reputation and understand the market and the legal framework in which they operate
  • Do not skip due diligence – now is not the time to skip the credit and rental record checks on prospective tenants
  • Consider the appropriate deposit requirements – do not skip this bit either – it is your safeguard against tenants defaulting

What can you do to keep your tenants happy?

  • Keep your annual rental increases within reason
  • Respond to maintenance issues promptly
  • Ask your tenants what practical infrastructure (such as shelving or cupboards) would make their lives easier and see if these can be provided

How can you attract the right tenants?

The big question you need to ask yourself is what makes your property preferable? Here is another reason why you should have regular conversations with your property manager – they can tell you what the trends are.

Does your property have:

  • An intelligent solar geyser that supplements with electricity when the weather is overcast (welcome to Cape Town in winter!)
  • A security system that is well maintained
  • A basic, water-wise sprinkler system if there is a garden
  • Is it clean and well maintained at the time of the viewing?

Remember…

At NFS we have seen it all – we have been in the business for over 30 years! We understand that noise and bad news can overwhelm. Social media and Google searches may sound very convincing, especially when they seem to confirm our worst fears. Trust me when I say these may very well be misleading. My clients know that when in doubt, they can contact us.

A good investment strategy that mitigates some short-term risks, can ensure a consistent long-term growth. The market will recover. It always does. It is already starting to do so!

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