Real Estate Investor Magazine South Africa July 2014

FINANCE BY KOOS DU DOIT Buy-to-Let Financial Perspectives Understanding the vacancy rate V acancies are a reality in buy-to-let property investment, and smar t investors make provision for this very real risk upfront: during the evaluation of a property as a potential investment. extended periods. In addition, low vacancy rates also mean that there is greater demand for rentals, which in turn translates into better prospects for annual rental increases. This is done by establishing the ‘vacancy rate’ for the area in which a potential investment property is located, which is determined by speaking to several letting agents in the area. The term ‘vacancy rate’ is used to express the percentage of time a buy-to-let property can be expected to be vacant. So, for example, a vacancy rate of 10% would translate into a one-month vacancy every 10 months. The vacancy rate should be factored into the cash f low projections for the property before making a buying decision, to ensure that a vacancy will not derail the investor’s cash flow position in terms of the investment property. Smart investors use a default 5% vacancy rate, as a risk management measure, even if the current vacancy rate for the area is lower. Using custom-designed software, such as the P3 Property Wealth Manager, makes it easy to make provision for vacancies in the cash flow projections. Download the demo version free of charge from www.hope.co.za. Obv iously, t he lower t he v ac a nc y rate , t he lower the risk that the property will be vacant for In the example above, a 5% vacancy rate is factored into the calculations. While this increases the shortfall the investor pays out-of-pocket by R250 to R1 835 per month (or R3 000 per annum) in the first year, it allows the investor to pay an extra R250 a month into the bond, building up a reserve fund in the bond, sufficient to cover a one-month vacancy every twenty months. This is an excellent way to cushion the impact of a vacancy on the investor’s cash flow, because if a vacancy occurs, the investor is already ahead with the bond repayments and does not need any extra out-of-pocket cash to cover the bond repayment. 28 July 2014 SA Real Estate Investor www.reimag.co.za

Real Estate Investor Magazine South Africa July 2014 | Page 30