“The problem with residential property is you’ve got a large group of unsophisticated buyers who actually look more at capital growth. You’ve got the unseasoned buyer-to-let investor who doesn’t even understand often what a yield is,” John Loos, a household and property strategist at First National Bank told ABN Digital in an interview.
He further explained that investors tend to use capital growth rates as a means to determine the future returns they’ll make on a piece of property. This method, which became a trend in 2006 and 2007, resulted in significant losses for first time buyers.
“When we started our FNB estate agent survey back in about 2004, it was estimated by the agents that about 30 per cent of total buyers were actually buying to let,” said Loos.
"That number is now round about seven or eight per cent. What was happening when we started that survey is that there was incredible capital growth that was when house price inflation was at its peak in 2004 and 2005. Those that then bought to let in round about 2006, 2007, I think they lost out badly.”
Erwin Rode, chief executive officer of the property economic specialist company, Rode and Associates, added that the house price cycle is lengthy and complex therefore it’s difficult for ordinary people that are not experts in the field to pinpoint where the cycle is currently sitting at.
“The property cycle, including the house price cycle, is a very long cycle, so it’s difficult for a layman to know where we are in the cycle,” explained Rode.
“In fact the cycle, to give you a feel for it, is between 15 and 20 years long. So, that means that in practice you’ve got about twice the opportunity in your working life to make a killing or to get bankrupt.”
Loos therefore advised that first time buyers delve into extensive research as well as seek professional help from qualified property experts.
The most important factor, he stated, is that one needs to understand what a yield is.
“The first thing is to understand is what a yield is. It’s the actual income you can earn off the property, In other words, the rental income relative to the value of the property. You should be buying an income stream more than looking at what you think capital growth may be,” said Loos.
In simpler terms, investors need to look at the price their piece of property can be sold at in 5 or 10 years’ time.
Another important note is that as a landlord, there is no guarantee that your tenant will be a reliable, honest and efficient payer.
“If you look at Tenant Profile Network statistics , they keep record of tenants in good standing, which is at 84 per cent but 16 per cent are not in good standing so there is a risk there,” added Loos.
Also, the legal rights and obligations attached to buying property need to be understood very well by the buyer.
“You must think when you buy a property to let, you’re buying a business. You cannot just sit back and the money will roll in. it’s not like a restaurant where you have to be there till 10pm every evening but there is a certain level of expertise and legal aspects that you have to be aware and understand properly or else you can become horribly stuck,” he said.
Other crucial factors to look at are the increasing municipal rates and how you will offload that onto your tenant, interest rates, operating costs such as the insurance of the property, rates, taxes and magnets.
It therefore takes several months of doing homework, checking markets and speaking to experts before becoming a seasoned property investor.