Buy-to-let basics for new investors

News > news - 30 Sep 2011
According to the latest bank statistics, buy-to-let property investment is starting to increase once more as continuing credit restrictions and the rising cost of living drive up the demand for rental property. And the trend is being further fuelled, says Jan Davel, MD of the RealNet estate agency group, by the current volatility in the world’s stock markets. “Understandably, however, buy-to-let investors are still very cautious and hunting rigorously for the right properties.”

Of course everyone would like to know where and when the next property boom will occur, he notes “but with this not being on the cards for the next few years, the best investors can do is to seek out areas where the demand for rental units is high - and growing – and the supply is relatively low.” A good place to start, he says, is in towns close to new capital projects such as power stations and places where mining activity is expanding.
“There are always contract workers looking for rental accommodation in these areas and generally a limited supply which underpins rental levels. “However, unless there is new development, the purchase price of suitable properties in these towns can also escalate rapidly, so prospective buyers should also scour popular rental areas in bigger towns and cities – those areas where students, young working couples and young families want to live because they are close to universities or technikons and well-supplied with shops, public transport and good junior schools.” Overall, Davel says, the basic factors to keep in mind when looking for a buy-to-let investment are the following: * Low prices relative to the potential for rental income. The smaller the bond on the property, the better the cash flow will be, but In the current market what you should be looking for is a property that will give you an 8% to 12% annual return on the value of the property in rental income. To work this out, divide the annual rental income by the purchase price and multiply by 100. *A stable local economy. Investments in holiday destinations are tricky because the health of the local economy tends to fluctuate with the seasons.

Demand for rental accommodation can also vary in places where there is only one university or college, or one major employer. The best areas are those where the residents have a mixture of occupations and income sources. * A low rental vacancy rate. You need to check how much rental inventory there is in your preferred area, as this is your “competition”. If there are many empty units and plenty of options for prospective tenants to choose from, landlords have to keep rentals down to compete. But if supply and demand are in balance and the property is in a good (popular) location, you should easily be able to keep your unit tenanted and increase the rent by a reasonable amount each year.
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