JP Morgan recently published an analysis of
US Monthly Rentals vs. Monthly Mortgage Payments, which made for interesting
reading. It indicated the average monthly rental at US$718 and the average
monthly mortgage payment of US$481, based on a 20% deposit and 30-year mortgage
bond at the current fixed rates offered. With a situation like this it would pay
every person to invest in residential property in high rental demand areas, to
the absolute maximum of their ability to raise finance and have the cash
deposit. This is not the situation in South Africa where monthly rentals are
significantly lower than mortgage payments.
I recently did the exercise for an
investment property I have bought and at a 100% mortgage level, the rental paid
on a property is only approximately half of what the net yield is. It therefore
is still quite a bit cheaper to rent than buy, but this is slowly changing as
excessive rental demand bids up rentals on a relatively small stock of
available properties. For a property investor weaker house prices can be very
good news. As rentals grow and house prices fall, the initial yield on a
property increases therefore making it more attractive to invest in residential
property as an asset class. Recently Tenant Profile Network (TPN), which has an
excellent database of rental property performance, and FNB, which has excellent
data on property sales prices, have collaborated to produce the FNB-TPN
National Average Gross Yield on Residential Rental Properties data set. This
shows that the low point in average rental yields at 6,65% was reach in
December 2006, as property prices rocketed, and then started to increase
steadily as property prices dropped. The average national rental yield is
currently 8,58%. The operating costs associated with a property have to be
deducted from this yield to get to a net yield. Rode and Associates have
suggested that as a rough estimate one can take 1.5 percentage points off the
gross yield to estimate a net yield. At an average net yield of 7.08%, this is
still below the cost of finance, currently at 8,5%.
One fundamental risk every
landlord adopts is whether he gets paid or not. TPN estimate that the level of
tenants in good standing is currently 83%. That means that 17% of rental
tenants had not paid on time. A property investor would therefore require a
risk premium in the yield to compensate for this. The question remains then if
8,58% is sufficient to encourage buy-to-rent activity. For me it was sufficient
as I see potential upside on both rental growth and price growth. For many
investors it is not as yet sufficient as the 4th quarter of 2012
buy-to-let buying is estimated at a mere 7% of total home buying. Nevertheless,
in a destination such as Ballito, which is experiencing a significant inward
migration of families from the greater Gauteng and Pretoria region, the
fundamentals are all correct for investment in buy-to-let opportunities. I have
seen the opportunity and put my money where my mouth is. Allow us to assist you
to do the same while the opportunity is available.
(Author: Andreas Wassenaar, published in The Bugle 16th January 2013)
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