The homework behind an investment home
23 May 2018
Buying a property is usually the first big investment in one’s life. Whether you intend to live in it, utilise it as an income generating asset, or a combination thereof, you really need to be sure to do your due diligence before signing on the dotted line. So, in seeking a true expert opinion on all things property investment, we spoke with Michelle Dickens, Managing Director of TPN, Africa’s largest credit bureau for rental properties and one of Absa Home Loan’s strategic partners.
TPN has been collecting and collating tenant data through their propriety software since 1999, constantly adding to the most comprehensive tenant database on the continent, and providing fast, easy and objective tenant vetting for landlords and rental agents. And, as any seasoned property investor will tell you, finding a reliable tenant is often the factor that determines the success of your investment.
According to Michelle, whether you’re looking to buy a property to live in or let, your criteria should remain the same. Tenants and homeowners want the same things: safety, security, transport links, access to services and other considerations; with the location and property type emerging as blanket factors in determining a good investment property.
“Smaller, secure properties in urban areas with good transport access could be considered ideal investment properties for any investor.” Michelle states, “Our data indicates that the highest tenant demand is for properties in the R3000 –R7000 monthly rent bracket, whilst the R7000 - R12 000 rent bracket sees the best performing tenants for rent collection, and the lowest vacancy rates are also seen in the R3000 - R7000 bracket. We can also determine that sectional title units, outperform full title properties, and smaller units outperform bigger units. So, this paints a picture of the preferred property type investors should be looking at.”
Once you have a clear picture of the property type and location that appeals to you, there are three key financial ratios that Michelle encourages you to take into consideration when finding your ideal investment property.
Firstly, there is the gross yield, which is the annual rent on the property expressed as a percentage of the property’s market value, as illustrated below as an example:
The gross yield is a good indication of the kind of return on investment one might expect on their investment property, with the national average currently sitting at 10.4%.
Next is the net yield, which is the annual rent, minus annual expenses, expressed as a percentage of the market value of the property:
The net yield takes into account the expenses of owning and operating the property, including a number of fixed and variable costs such as rental management fees, council rates, utilities (provision of water, sewerage, electricity and refuse removal services), insurance, maintenance and repairs etc. This is harder to calculate, but paints a more accurate picture of your return, and many of these costs can be factored into the rent, thus your tenant will help pay some of these off.
Tip: Read this article, if you find yourself asking, what is a good rate of return for an investment?
Finally, there is the good standing ratio, which is a propriety ratio used by TPN to indicate, by area, the likelihood of tenants defaulting on their rental payments. It is obtained by calculating the gross yield of a property against the delinquency rate in that area (the rate at which tenants fail to pay their rent), and is available from TPN.
Even if you’ve done your homework and found the perfect property with favourable expected returns, Michelle has a few other suggestions before you buy: “You should always ensure you can actually afford the property (check out: Know your affordability and Can I buy a house on my budget?) and that you have the cash flow and reserves available, should you have a vacancy or non-paying tenant. Assess the financial strength of the body corporate by looking at the following documents:
- Financial Statements of the Body Corporate
- The extent to which the Body Corporate has made plans for future maintenance or special projects pertaining to the complex
- Levy payable
- Rules governing the Body Corporate
Bear in mind that you also have to consider the quality of the area you’re looking at, as well as the quality of the existing tenant, if there is one. And please, more importantly than anything else, place a quality tenant. I think it’s better to have your property sitting vacant for a month, or even two, than to place an unreliable tenant – where you incur legal costs for the eviction of a non-paying tenant.”
Michelle also advises conducting the credit screening and including the names of both partners (example – husband and wife) on the lease, if possible, as this gives the landlord greater recourse in the event of non-payment.
TPN provides a number of products and services for landlords to review area trends and screen tenants (TPN Credit Bureau)), draught leases and legal documents (LeasePack), and comprehensively manage your property’s cash flow and invoice your tenant/s (RentBook). With these and many more services available to Absa Home Loan clients either free of charge or at a discounted fee, there really is no reason you can’t invest in property with the peace of mind that comes from having all the data and tested legal documents behind you.
Before parting, we asked Michelle if she felt that creating wealth through property investment is viable: “Yes, absolutely,” she says without a second thought, “Wealth creation in my opinion, just like property investment, is about having a long-term strategy. And the fact that you can effectively get your tenant to finance the investment, makes it a very attractive means to do so.” And is now a good time to invest in property? “It’s always a good time, as long as you know what you’re looking for and where to look.”
Tip: read our property economist’s view, on why it’s a great time to buy property.
If you’re looking to grow your investment property portfolio – be sure to explore Absa’s property investor offering.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.