Why Rental Properties Are a Good Investment – Your Guide to Building Wealth

Article summary:

• Research the market before investing in rental property.
• Know your target market.
• Decide whether to invest in residential or commercial property.
• Calculate your likely rental yield.
• Obtain funding by applying for a bond.
• Applying with ooba Home Loans helps you secure the best deal on your bond.

Property investment remains the best way to build long-term wealth, and experts say budding property investors should get on the property ladder as soon as possible.

Why get bogged down in renting properties when you can invest, and generate profit that can be used to pay the bond on the property, as well as on your own home.

Buy-to-let is the bread and butter of property investment. We explain why rental properties are a good investment and provide a guide to securing profit.

What does buy-to-let mean?

Simply put, it means you purchase a property and then rent it out. You generate profit from the rent.

People usually invest in residential properties such as apartments and rent them out to families or young professionals.

However, you have several options when entering the property market.

Understanding rental yield
You’ll often hear buy-to-let investors talk about the rental yield on their properties (or property portfolios).

The yield is simply the annual rent you’re earning on the property divided by its value, expressed as a percentage.

So a house worth R1 million, on which the annual rent is R120 000 (R10 000 a month) would be yielding 12%.”

When investing in rental property, prospective rental yield is something you need to assess before going ahead with the purchase.

Understanding deductible expenses
Expenses are offset against your rental yield, but certain expenses related to managing the property can be classed as business expenses and thus deducted from your tax burden.

Some examples include:

• Maintenance and repairs.
• Municipal rates.
• Agent’s commission.
• Properly insurance.
• Body corporate levies.

How do you fund a rental property?

The standard way to acquire funding is to apply for a bond from a bank.

Your chances of obtaining bond approval depend on your credit record, a three-digit summary of your financial situation.

What is a good credit score?
You need a credit score of at least 610 for the bank to consider your home loan application, while anything above 661 is regarded as a decent credit score.

Bear in mind that most banks do not take potential rental income on the property into account when assessing your bond application.

How can I find out my credit score?
You can get pre-approved with ooba Home Loans. The pre-approval process includes an assessment of your credit score.

What if my credit score is too low?
Applying with ooba Home Loans will give you the best chance of bond approval even if you have a low credit score. ooba Home Loans submits your application to multiple banks.

Competition between banks to secure customers is strong. Some may be more willing to approve bonds with lower credit records.

You can also take measures to improve your credit record, such as by paying outstanding debts, settling accounts, and keeping your credit ratio below 30%.

The benefits of a joint bond application
Many first-time property investors take advantage of the joint bond application option, which is a bond guaranteed by at least two parties.

The additional parties agree to take on responsibility for paying the bond if another party defaults.

You could invest with business partners, making the bond more affordable and more likely to be approved.

What are your responsibilities as a landlord?

Your primary responsibility will be the repair and maintenance of the property.

The tenant is entitled to submit complaints to you which you will be legally obligated to resolve.

The amount of maintenance required depends on the property type. Residential properties usually require a lot of maintenance.

Dealing with difficult tenants
There is a risk of tenants who are late with payments, don’t fulfil lease terms, and/or don’t take care of the property.

This is why it’s so important to:

• Screen tenants carefully. Conducting interviews and seeking references are useful for this.
• Pay attention when drawing up a lease agreement, which will stipulate the obligations of the landlord and tenant. You may want to seek the advice of an attorney or estate agent.

If a tenant is late with payments, you can serve a legal notice, proving a written demand for payment. The tenant has 20 business days to respond.

If the tenant refuses to comply, you can initiate eviction procedures in compliance with the law. Seek legal advice if you’re unsure of your legal obligations.

Preparing for property investment

Note: We highly recommend obtaining the services of an estate agent. They can:

• Advise you on the movements of the market.
• Help you identify a potentially lucrative property.
• Help you market the property.

You do not have to pay estate agents upfront. They collect a commission on the sale of a property.

Understand the movements of the market

You’ll want to conduct research and determine:

• Which property types are doing well?
• Which locations are ripe for investment?
• The level of supply and demand.

Property demand is currently high in South Africa due to a shortage of accommodation. This suits property investors looking to rent our properties.

ooba Home Loans data shows that 32.9% of Western Cape’s property demand stemmed from buy-to-let applications in June 2023 alone, an increase from 21.5% in March 2020.

It helps to be aware of trends, such as:

• Semigration: A large number of South Africans are moving to scenic regions, especially coastal areas.
• Work-from-home: In the wake of the pandemic, the work-from-home lifestyle has become prevalent. As such, properties in remote, scenic areas have become more popular as people seek more comfortable home environments to enjoy their work.
• Mixed-use-developments: Piggybacking off the above trend, there’s a higher demand, especially among younger generations, for complexes that offer on-site facilities such as office areas, fibre and gyms.
• Student accommodation: There has been an increase in student enrollment for South African universities, but data shows that there is not enough accommodation to satisfy the demand.
  In 2022, the International Finance Corporation (IFC) reported that there is a shortfall of more than 500 000 beds.
  Investors should be looking for affordable accommodation with on-site facilities that cater to student needs.

Interest rates
An important thing to keep track of is interest rates, as this will significantly impact what you pay for your investment.

As of December 2024, the interest rate is 11.50%. This follows an interest rate cut of 25 points in September 2024; the first cut in years.

Experts predict more cuts on the horizon, making it a good time to invest in property.

Decide on a property type

Residential properties are the go-to for rental property investments, but commercial property is also a viable investment.

The earnings potential is significantly higher on commercial properties. The Capex rate in South Africa is currently +11% for commercial properties, versus 5-8% for residential properties.

Commercial properties include:

• Retail buildings.
• Industrial buildings.
• Office complexes.
• Warehouses.

Retail properties are considered an especially promising investment currently. Retail properties made up 30% of commercial property transactions in 2023 / 2024. Data also showed that mall visits between January and October 2023 were up 3%.

Industrial properties are always a solid investment as they have longer leases and more committed tenants, and there is a high demand and low supply. Downsides include a limited tenant pool, significant maintenance costs, and the fact that owners are liable for injuries that occur on the property.

Bear in mind that banks will only finance up to 75% of a commercial property purchase, meaning you’ll need a deposit of at least 25%.

Know your target market

Your target market should be the first factor you take into account. It will determine the location you invest and the property type you invest in.

Potentially lucrative markets include:

• Students looking for affordable accommodation near universities.
• Young professionals looking for mixed-use developments in bustling areas.
• Retirees looking for scenic estates.
• Young families looking for properties in family-friendly areas close to schools and hospitals.

Acquire funding

As mentioned, you’ll need a plan for acquiring funding. Will you apply with business partners in order to secure a joint bond, or go it alone and take the risks to reap the rewards?

As mentioned, ooba Home Loans can be invaluable in applying for a bond by submitting your application to multiple banks. So apply with ooba Home Loans to get the best deal on your bond.

Find out what you can afford

Your first step in any investment should be to find out what you can afford in the first place.

For this, seek ooba Home Loans’ help by getting pre-approved. Our pre-approval process provides you with a solid investment of what you can afford so you can hunt within your range.

You can get pre-approved by contacting an expert at ooba Home Loans or by using our free, online pre-approval tool, the Bond Indicator.