As interest rates continue to rise in South Africa, real estate investors need to be strategic in finding deals that are still cash flow positive. In this article, we'll share insider tips to help you navigate the current market conditions and make smart investment decisions.
Current Interest Rate Hikes in South Africa
The South African Reserve Bank (SARB) recently announced a 50 basis point hike, taking the current prime lending rate from 10.75% to 11.25%. Additionally, the Monetary Policy Committee (MPC) decided to increase the repurchase rate by 50 basis points to 7.75% per year, effective March 31, 2023. This change will impact the affordability of property investments for many South Africans, particularly those who have financed their properties up to their maximum qualification, and reduce demand for properties.
However, as Christiaan Jansen, financial specialist and Franchisee at threesixty finance – Menlyn, explains, interest rate hikes are not a new phenomenon in the South African property market. "The market is cyclical in nature and will always follow some form of trend," he says. "We’ve seen gradual hikes, which will likely remain at this elevated level for a while, then have a sudden drop. Look at the hiking cycles in 1998, 2004, 2008, and now."
(Source : Portfolio property investments)
Jansen advises that the key to success in any market condition is to focus on cash flow when buying real estate. "The old adage remains: a willing buyer plus a willing seller equals a successful transaction," he says.
Determining Affordability in the Current Market
One of the biggest challenges of interest rate hikes is determining affordability, both for investors looking to purchase new properties and for those who have existing properties and are considering refinancing. Jansen notes that "the hiked rates reduce bond affordability, so we may well see a decline in the number of refinancing applications, simply as a product of lowered bond qualification."
For individuals who have financed themselves up to their maximum qualification, there isn't room for further financing if they are at their maximum capacity. This can lead to them being effectively out of the market for a period of time until either their income increases or the rates drop.
Tips for Finding Cash Flow Positive Real Estate Deals
Despite the current interest rate hikes, there are still opportunities to find cash flow positive real estate deals. Here are some tips to help you do so:
Determine how much you can afford: Before you start looking for properties, determine how much you can afford. Take into account your current income, expenses, and debt. Knowing your financial limitations will help you narrow down your search and prevent you from overextending yourself.
Look for deals in the extended buyers market: The current market conditions have created an extended buyers market, meaning there are more properties for sale than there are buyers. This puts you in a better position to negotiate and find deals that meet your investment criteria.
Don't rush into a transaction: With the extended buyers market, there is no need to rush into a transaction. Take your time to thoroughly research the property and the surrounding area, and consider the potential cash flow and return on investment. The property market is still stable, so there's no need to feel pressured to make a quick decision.
Always buy for cash flow: Regardless of the interest rate environment, it's essential to always buy for cash flow when investing in real estate. Look for properties that generate enough rental income to cover your expenses, including mortgage payments, property taxes, and maintenance costs. This will ensure that your investment is profitable in the long run, even if interest rates continue to rise. Such properties are available on our investRand marketplace.
While the current interest rate hikes in South Africa may present some challenges for real estate investors, there are still opportunities to find cash flow positive deals. By taking a strategic approach and following our insider tips, you can make smart investment decisions and achieve long-term financial success. Remember, always buy for cash flow, and don't rush into a transaction. With patience and persistence, you can find real estate investments that will make you money in the current market.
Ready to navigate the current real estate market and make profitable investments despite the interest rate hikes? Book a call with one of our experienced consultants today to discuss your investment goals and create a customised plan that works for you. Don't wait - take control of your financial future now!
Disclaimer : None of the information contained here constitutes an offer (or solicitation of an offer) to make any investment, or to participate in any particular investment strategy. investRand does not take into account of your personal investment objectives, specific investment goals, specific needs or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here.