Real Estate Investor Magazine South Africa August 2013 | Page 30

SMART MOVES BY KOOS DU TOIT Buy-To-Let Is it risky business? M any so-called “investment experts” – and even those who dispense “investment advice” around the fire – simply dismiss buy-to-let property investment as being “too risky”. Of course, all investments entail risk – there is no such thing as a risk-free investment. However, it is a myth that buy-to-let property is a high risk investment. This is because, unlike many other investments, buy-to-let property investment allows investors to manage – if not eliminate – all the major risks involved. Managing tenant risk Bad tenants are undoubtedly perceived as the single biggest perceived risk when it comes to buyto-let property investment. But, again, this risk can be managed very efficiently by: • doing thorough research before investing in an area to ensure a strong and ongoing demand for rentals for the type of property; • factoring in a vacancy rate of 5% into their cash flow calculations, even if the vacancy rate for the area is lower; • reducing rentals on a short lease basis when market conditions demand it. Interest rate hikes Many investors who quite easily obtained 118% bonds at the height of the property boom, which coincided with low interest rates, faced severe cash flow strain when the interest rates increased rapidly and dramatically. But this risk can be managed eff iciently with just a few simple and affordable risk management techniques, such as: • doing thorough background checks and obtaining referrals from previous landlords; • signing a water tight lease and collecting a deposit to cover potential damages; • collecting a separate deposit for utilities or installing pre-paid electricity and water meters; • doing proper inspections with the tenant before, during and after occupation; • taking out rental insurance to cover late or non-payment of rentals or evictions; or • appointing a reputable and professional rental and property management company to take care of all the above. In the current low interest rate environment, this is again a major risk but, nevertheless, it is a risk that can be managed efficiently by: • building in an interest rate “buffer” by calculating your cash flow projections on the long-term average interest rate before buying a property to ensure you can absorb future interest rate hikes without impacting your cash flow; • fixing your own interest rate by paying a few hundred Rands extra a month into the bond, instead of paying a higher repayment for a fixed interest rate through the bank - the extra payments will reduce the interest payable, and will build up a reserve of funds that can be used to cover the increased bond repayments when interest rates do rise. Vacancies Maintenance Perhaps less terrifying than a bad tenant, but still a scary prospect for an investor, are vacancies, which will require the investor to subsidise all the costs related to the property from his or her own pocket. Rout ine ma intena nce a nd pa r t ic u la rly unexpected repairs, as well as damages caused by tenants, can place an investor’s cash f low under severe strain. 28 August 2013 SA Real Estate Investor These risks can be managed by: • taking out the insurance to cover damages caused by tenants; • budgeting for and implementing regular and ongoing maintenance; • budgeting for unexpected repairs and maintenance. Poor buying decisions A buy-to-let property investor can also make poor judgement calls. However, this risk can be managed very effectively by: • using a proven system, backed up by solid training and easy-to-use software, such as the P3 Investment System, to ensure you buy the right property in the right area, with solid rental demand and good prospects for capital growth, at the right price and with the right finance; and • ensuring every buy-to-let investment decision is thoroughly considered according to current variables and future performance, including cash flow projections and provision for vacancies, maintenance and other contingencies. Buy-to-let property investment, like any other investment, entails risk. However, what sets buy-to-let propert y apart from other investment options is the ability to manage – if not eliminate - the risks involved through tried-and-tested risk management strategies that are simple and cost-effective to implement. As a result, the myth that buy-to-let propert y investment is a high risk investment is a complete fallacy. In fact, buy-to-let propert y investment is a virtually risk-free investment if prudent risk management is applied. RESOURCES P3 Investment Group www.reimag.co.za