We have all dreamed of buying our first home. Aside from satisfying our most basic of Freudian needs for shelter, it is also regarded as a great investment that has the added benefit of being your home. Besides, why pay rent when you can pay off a bond, and ultimately when it’s time to move, you can just let out your first home and have someone else pay your bond for you, or sell it and enjoy some healthy returns… right?
We have all heard it before, but the reality is most of us don’t follow this pattern. The truth is the majority of South Africans rent for a long time, with an average of first time buyers sitting at 35 years of age. Even then, many of us put very little thought into treating a home purchase like a smart investment by doing things like electing to pay off the bond over a lifetime (bad idea!).
The fact remains that an investment into residential property is, whether it be as a home to live in, or as an actual investment that you rent out, an expensive exercise that typically takes many people a long time to achieve. Deposits, transfer costs, the list goes on. All these things are constant deterrents making access to residential property slightly more prohibitive or unattractive.
Yet, and despite its difficulties, countless individuals have built large fortunes in the residential property space. The fact remains that this investment vehicle is solid and constantly outperforms many other investment options. So what is the problem? Why do so many people delay before investing in property?
For the purposed of this post, I am going to focus on buying property as an investment to be rented out, but if you are buying to live, this will still apply to you.
Ask anyone who has been down this road before and they will tell you that when you buy a house, the hidden costs and unforeseen bills just keep on coming. It’s a costly process with expenses that may not have factored into your initial affordability calculations.
When you are thinking about how much you want to invest, you need to be thinking about transfer duties, legal fees, and bond registrations. This, on top of the amount you are putting forward as a deposit will paint a clear picture of upfront costs.
So remember, finding a property that suits your budget is NOT step one. Focus on what you have to invest and work backwards from there until you have the REAL investment amount and property value you can afford.
Walking away with a monthly profit from the rental income you aim to accrue is always first prize, but it relies on many factors that can also change along the way. A swing in the interest rate you are paying, or an increase in complex levies or rates and taxes could turn your position from cash positive, to negative.
Always be sure that you are in the know regarding the potential rental income of the property you are looking to invest in, v/s the levies, rates, taxes, bond repayments and linked interest rates that apply to your investment.
Tenanting your investment property
Once you have successfully purchased your investment property, it is time to find a rent paying tenant. This also comes at a fee, and typically a rental agent will charge the equivalent of one month’s rent as a fee for tenanting you property.
Something that must always be at the top of your mind is that the tenant in your property is what will ultimately make this investment worthwhile or not. South Africa’s laws are heavily in favour of tenants, not landlords. Meaning in simple terms that if you have a bad tenant that is either abusing your property, or is not paying rent as agreed, it is very hard to evict them.
Non-payment of rental is also a reality, and any property owner must consider their liquidity to ensure that they can cover the shortfall of non-payment by tenants, or bridge the gap between when the bond is due, and when rental is paid.
Lack of investment knowledge
I have had countless conversations with potential buyers that have all the best intentions behind their investment, but simply lack the understanding of what to look for when investing in property long term. Solid ground work behind the area in which you want to invest, the type of property, its historical performance, the development plans for the surrounding areas, and the potential negative drivers that could affect long term growth are all vital metrics that must be considered to ensure a smart investment is made.
At times, you may find an area that you really like, but once properly explored, may be an average investment decision. Investors must always be on the lookout for a potential investment sweet spot that ticks all the boxes for long term growth.
How to structure your Property Portfolio
Unless you understand the tax implications of owning and earning income from property, this section may seem irrelevant. But many an investor who has overlooked the legalities of growing a property portfolio has come off second best, losing huge amounts of value to taxes and penalties that could have been avoided if properly set out in the first place.
Consulting an expert in the early stages of setting up your portfolio is highly recommended. This will ensure that the growth you experience in your portfolio is carried by the right vehicles to ensure the investments protection.
When to get out
With any investment, knowing when to get out is vital. Luckily with property, which is far less volatile than the equities market, movements can be slow and somewhat predictable. However, unlike equities, it is not always the market that determines the performance of your portfolio. As mentioned above, there are other, micro-factors and influences that could cause negative growth in your portfolio.
Your areas of investment must always be carefully monitored to ensure the correct signs of growth are at play. Most investors pay close attention to this. However, most investors forget that even closer inspection of the financial health and performance of the complex’s in which you own property is essential. A poorly run body corporate can cause a complex to lose value rapidly, turning what was a sound investment into an immovable hindrance.
When is the right time to buy?
I won’t bore you with a long speech about the time value of money, so let’s just say that delaying an investment opportunity is always a bad idea. If you have the financial backing to accrue property and build your own portfolio, my advice would always be to go ahead. If you lack experience and need assistance, find an institution (not a bank) to advise you.
If you do not have the funding to invest in real-estate, then I would suggest looking to the right mechanisms through which you can access the real-estate market. There are group investment schemes that you can explore that can offer you a share in your own property portfolio, with a fraction of the upfront investment.
But what about South Africa’s economy?
While global sentiment of the South African economy is down, one must always remember that being at the coal face has its advantages. There are many positive signs that show South Africa expanding its economy and building on its GDP over the coming years. South Africans are in a strong position to equip themselves with undervalued assets now, to enjoy a successful ride of capital appreciation.
Many a millionaire has risen out of recession. It is the smart ones that realise that when other people are greedy, they should be prudent, and when those same people are prudent, they should be greedy.
Real opportunities are unveiled in trying times, and investing in the vehicles that can assist you in exploiting those opportunities is key.