*This article first appeared in our Property360 digital magazine.
Landlords are at a crossroads.
Not only are they dealing with financially strapped tenants but a weak demand for their properties as those tenants who are in strong financial positions look to buy their own homes.
They are also facing new property demands from prospective tenants in the post-Covid world.
While landlords are “fortunate” to operate in an industry that responds to the basic human need for shelter, the landscape is changing, notes Paul Stevens, chief executive of Just Property.
“Thirty-five percent of tenants are risky, and property features like workspace and WiFi access, security and room for inter-generational living are in demand.
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“There is no doubt in my mind that opportunities exist for savvy landlords who are able to respond to this changing environment.”
Those who can, should find out what tenants in their areas are looking for and measure the extent to which they can adapt to meet those needs, he advises.
“A short-term investment now may make your property more attractive in the long-run. As in life, you need to stand out from the crowd; look for how you can add value for tenants without risking your own financial well-being.”
Hang on, if you can
As tough as the environment may be, landlords should just “vasbyt” and do as much as they can to attract and retain good tenants, Stevens says. He also advises them to ask their local property practitioners for specific market data to help them through these times.
“They should be able to tell you what is happening with regards to vacancies, tenant default rates, comparable properties on the market, sales trends and more. Collect as much objective information as you can before making any decisions.
“Beware of hearsay and opinions; they may be unreliable. Property, like all asset classes, moves in cycles and this is yet another cycle.”
Duncan Balmer, co-principal of Jawitz Properties North Coast in KZN, agrees.
“My advice in the current market would be to hang in there... Give your property some TLC, a little paint and some improvements if you have the budget...
“If you have a good tenant who looks after your property like it’s their own, I’d definitely hang in there and wait for better times.”
Even if you have to lower your rent within reason or accept the same rent, give serious consideration to keeping a good tenant as opposed to having to look for a new one, advises Herschel Jawitz, chief executive of Jawitz Properties.
“If you factor in a possible month or more of vacancy and having to upgrade the unit if needed, it pays to hang onto a good tenant.”
He also believes that investors should hang on to their properties in all situations, unless they “absolutely cannot” and are falling behind with their mortgage repayments and levies or rates.
“If so, don’t wait. Sell and live to invest another day.”
Stevens notes that the current situation of rising vacancies and declining tenant pools is not new, but has been exacerbated by the pandemic.
Knowing when it would be better to sell
Investment property owners should consider getting rid of their properties only when they have exhausted all other avenues to make ends meet, he says. “In the long run, property values usually appreciate but you need time to recover from the initial outlay of buying property and to reduce your mortgage loan (if you have one).”
In the following situations, Stevens concedes that it may be worth considering selling:
• When the rental market is genuinely flooded and your property simply cannot compete on price or features.
• When you cannot afford to keep the property if you have had to drop the rent to keep it occupied.
• If the area has started to decay and attract the wrong tenants.
• When opportunities exist elsewhere and selling will give you the finances and freedom to invest there.
Echoing this, Balmer says landlords may be wise to consider selling when the area their property is in deteriorates or if their property is in desperate need of maintenance and their finances do not allow it.
“Some properties are maintenance nightmares and cost more on upkeep and repairs than they are worth in rental income.
“Taking all these costs into consideration, if you’re not getting any capital growth then it might be worth selling or looking for greener pastures.”
Timing your decisions
Each investor will have their own circumstances and requirements in terms of a minimum rent they can accept, but Jawitz says this is not a time to wait for a rent that may not be achievable for now.
“Putting in a tenant is about cash flow and cash is king. If you find you absolutely have to sell, don’t wait until the bank is knocking at the door. The more time you have to sell, the better the price. If you can, find other ways to reduce your monthly expenses so you can keep the investment. In the short term, there may be some pain but you will get longer-term gains.”
When is the need to sell urgent?
This, Balmer says, all depends on landlords’ personal financial position.
“A property will only sell for what the market is willing to pay for it, not necessarily what you want for it. Do you have the luxury of holding on until you get the price they want? Or should you consider selling it for reasonably less, considering the market?”
A real estate agent should be able to provide objective, data-driven insights into what a landlord could reasonably hope to achieve in terms of the selling price and time the property will stay on the market, Stevens says.
“Time-on-market is hugely variable, so look for suburb-specific insights. Balance this with the views of data analysts who have offered market projections and assess whether you are in a position to hold out for the best price or if a quick sale is what you want.”
Jawitz says: “Every seller has aspirations of what they want to sell for or what they may have to sell for to pay off the outstanding bond. The challenge is that buyers may see it differently. Sellers have to satisfy themselves that at the time of accepting an offer, given their circumstances, this is the best price the market will pay.”
Is it wise to invest in buy-to-let properties now?
Just because the rental market is struggling does not mean that investors should steer clear of it. Rather, they should know which segments of the rental market are performing well.
“Upmarket rental properties (R1.5 million-plus ) are not always the best investments as tenants are not readily available and your returns are normally not as good,” Stevens says.
Properties below R1m in sectional title complexes though are often the best investments as they are in demand and your levies take care of all exterior maintenance costs.”
In addition, he says, there are still developers around the country building new units that can achieve a 10% return, “which has always been a good benchmark for investors”.
When looking for a good investment property, Balmer advises landlords to consider its security, which is “possibly the biggest factor” for tenants.
“A property in a quality, well-run complex with good security is easier to let and seems to be more resilient.”