What you should know about rental property as an investment

Against the backdrop of an economic downturn with rising inflation, volatile markets and increasing interest rates, the South African property market can be expected to react.

With the average house price having already fallen by 0.8% year-on-year to November 2015, prospective buyers have an edge in a downmarket with seller’s that are negotiable on price.

Investing in property should be a real consideration, especially when the rental market demand is expected to increase due to fewer buyers entering the market.

Property investment can take different forms and building a rental portfolio can be as simple as acquiring property that will generate regular income while growing in value over time.

Investors can also venture into local and offshore properties or listed property shares; it all depends on individual circumstances, affordability and risk appetite.

Based on current trends, investors may be encouraged to look into rental property as an investment since demand for rental properties is projected to increase, predominantly within the entry-level residential sector where many first-time buyers might find it more difficult to qualify for bonds.

In addition to affordable lock-up-and-go properties, there are other non-traditional residential properties that can be considered, including student accommodation and retirement properties. If properly managed, such properties can prove quite profitable in the long run.

Of course there are certain conditions that need to be met if an investment property is going to pay off, especially in an increasing interest rate environment, which could erode rental yields.

Fundamentals such as: location, quality of construction, cost of servicing and maintenance, surrounding amenities, prospective property demand as well as historic and projected property price growth all need to be carefully considered.

When leasing, it’s also imperative to ensure as far as possible that the tenant is financially sound and that the rental agreement provides scope for inflation-linked increases. This will allow the investor ample room to cushion against relative volatility and changes in the economy.

*Praven Subbramoney is CEO of FNB Private Bank Lending

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