How to get the best returns
Solid, practical advice from two industry experts for those considering residential or commercial property investment
Buying a property as an investment with the intention of letting it can be a stressful and costly exercise, both in money and time. However, there are things to be aware of if you are aiming for good returns. These industry experts offer their respective tips for choosing commercial or industrial properties, or opting for a residential buy.
Quagga Properties MD Len Pearson offers these tips for investing in commercial or industrial property:
1. Buy-to-let investments in the commercial and industrial property sector yield rental returns far higher than residential rental returns. Typically, you can expect a gross return (before expenses) of 11.25% and a net return (after expenses) of 9%.
2. Rental leases are usually three to five years, which means that you do not need to look for a new tenant or renegotiate rental rates. The escalation rates are included in the contract and are normally between 8.5% and 9.5% a year.
3. Due to the nature of the buildings, commercial and industrial properties are far more difficult for tenants to “destroy” and therefore easier to keep in optimal condition. Another plus in the commercial and industrial sector is that when tenants vacate a property at the end of a lease they are legally required to return the premises to the exact condition it was in when they first moved in, at their own expense.
“Buy-to-let investments in the commercial and industrial property sector yield rental returns far higher than residential rental returns”
Len Pearson, MD, Quagga Properties
4. The best size commercial premises to invest in are between 200m2 and 500m2 as these have the biggest demand from tenants.
5. It is not advised to invest in a smaller factory (under 100m2) as these factories generally attract start-up businesses that are not financially stable and could end up not being able to fulfil their lease obligations.
6. New or virgin commercial and industrial property investors should always go through a reputable broker active in the sector. The broker will be able to advise you on all properties available as well as help with financing costs and securing financing arrangements, for example through a bond originator.
“Kohler says: “A rental property should always be competitive in price and must be well maintained. If a good tenant is placed in the property and it is well looked after, the owner will get the best out of it and tenants will also be willing to pay the asking rental charge.”
Lansdowne Investment Property CEO Jonathan Kohler offers simple rules for buy-to-let property investment:
1. A managing agent can choose a good tenant, but it is key to ensure that the agency’s credit department is independent of it. The deposit paid by the tenant will safeguard against any damages made to the property during the rental agreement, so it is critical to have this in place.
2. A property in a good area with high demand for rental properties will yield excellent returns on rent every month. Keep your investment properties in the property price sweet spot of R800,000 to R1m and you will increase your chances of the property always being tenanted, and easily sold at a good price. A one-bedroom flat has a 2% higher rental return than a two-bedroom. It is also important to remember how much bigger the market is that can afford to pay on average R7,000 a month in rent.
3. The less you have to pay to make up for the difference in either monthly bond repayments or levies, the better the investment. The shortfall payment, which is the difference the investor has to pay monthly to make up the total amount required by the property, should be as low as possible. On a good investment, you should start seeing a surplus from the rental income collected after 24 to 36 months. Annual rental escalations, which should be incorporated into lease agreements, will also help to reduce the overall shortfall.
4. Do your due diligence, especially if you are investing in sectional title developments, to ensure the body corporate and trustees are financially viable. From an estate management perspective, assess the types of service providers used. Many investors tend to neglect their rental properties and only conduct maintenance when things are falling apart.
5. Check the valuation of the property, whether you buy it at market value or from a distressed seller, to ensure your capital appreciation, which is linked to purchase price. Capital appreciation is only realised when the property is sold.
Credits: Photos: iStock, Text: Neesa Moodley & Supplied