PROPERTY: Investing in Property - Build a Property Portfolio
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“Property has always been perceived as a relatively stable and safe investment class and indeed when one considers the market cycles it is interesting to note that many nodes in South Africa have achieved the same sales value this year as was the case in peak of the market in 2007. Interestingly enough, while value has caught up, the total number of units is still behind on the 2007 peak, which indicates that the average selling price has increased and price inflation is very much on an upward curve. Essentially, the message is that despite the most catastrophic global recession experienced in 2008/2009, residential property has recovered quickly and is already showing positive growth -demonstrating its ongoing resilience as an asset class.”
She points out that property is also attractive as an investment class because, if correctly geared, investors can leverage their property portfolio and effectively use other people’s money to grow their asset base. The first critical issue is to ascertain what type of property investment you seek. For example, you may be looking to flip for profit which is a shorter term investment strategy and involves securing a good purchase with potential to renovate and resell in a short space of time.
“If this is your aim, then it is ideal to purchase a property that requires cosmetic changes rather than structural ones, as the key is to try and spend around 15 percent of the value of the property on renovations. If the renovations are extensive, and therefore expensive, you may need to hold onto the property for a period of time in order to maximise the gain. If you are looking to flip, then acquisition costs need to be factored into your sums, and capital gains tax also needs to be taken into account. Ideally, you want to buy for under R2 million, spend a maximum of R300 000 renovating and then achieve a gain on the resale of at least 10 percent of your total expenditure. Your sums need to include finance costs, transfer costs and then capital gains tax. Some investors prefer to play in the market under R1 million because transfer costs are much lower (R25 000). However, in this price category one needs to be aware of not over-spending on the renovation, and then struggling to recover the costs on the sale.”
She says looking at medium to longer term investment options, there are essentially three key factors to bear in mind: risk, return and growth. If minimising risk is important, then you should consider a diversified portfolio or perhaps a portfolio with a number of small investments spread across a few nodes. If you have a lot of money to invest, then perhaps long term capital appreciation is your main priority in which case you require a solid investment portfolio in the most sought-after areas.
“When taking risk into consideration, tenant profiling is key. To this end, statistics show that the most reliable tenants are those in the R5000 �“ R15 000 per month category. This means that from an investment perspective, properties that sell for between R1 million and R3 million are your best investments from a rental return perspective. A good way to get started is to try and find a sectional title unit with two bedrooms for under R1 million. Transfer costs will be low and your tenant profile will be good. At this level, you should try and put down R500 000 and gear the balance by way of a rental of at least R5000 per month. If your rent just covers your costs (or is slightly lower than your costs) then you will enjoy the tax benefit. Essentially, you now own an asset valued at R1 million, but you have only had to pay R500 000 for it.”
In time, your rent will escalate and if you are able to pay in an extra amount of say R1000 per month on your bond, you will very quickly reach a position that will enable you to leverage this asset and use this access facility to enable you to acquire your second sectional title unit. If you have been ‘overpaying’ on your bond each month, you will then be able to utilise this access facility to put down a deposit on your next apartment and then secure a tenant to pay your bond instalment on your second property. Says Reynolds: “Remember that a home loan is the best vehicle for borrowing money, and my advice to all consumers is to aim to have no debt at all, except for a home loan access facility. This is the cheapest way to borrow money and finance investments.
“By applying this strategy, after an initial investment of R500 000 you may be able to acquire two or three units each valued at R1 million over a few years and suddenly you own an asset base of R3 million. As a small investor this is the best way to get started as your risk is minimal, your borrowing needs are small and if you ever need to quickly off-load a property, this price range is the easiest to sell. There is also an abundance of tenants in this price category, so there is very little risk of your property being vacant and costing you every month while you wait to place a tenant.”
At a higher level, investors may be seeking a more diverse property portfolio with a combination of commercial, industrial and residential properties. From a commercial/industrial perspective, very little emotion is involved in the purchase and hence, the only factor to consider is return on investment. Generally, commercial investors are not that concerned about area, as long as the investment works. In residential property, area is always a critical factor.
Says Reynolds: “Property is a unique investment class because it is tangible and because investors are able to gear their investments with their rental income. Through gearing, and even syndication, small investors can get started with a relatively small deposit and in time, their asset base can grow into something of significant value.’
Currently Pam Golding Properties is marketing the last two remaining, brand new upmarket units which are being sold off-plan in a redevelopment on a prime site in Morningside, Durban. Both units include two bedrooms (one en suite) and two bathrooms, with an open plan design and the latest top of the range fixtures and fittings. Positioned close to popular restaurants, private schools and places of worship the apartments are priced at R1.27 million for an 82sqm unit, while the penthouse is priced at R1.52 million and comprises 164sqm consisting of 82sqm of living space and 82sqm of terrace with Jacuzzi, astro turf and paving.
Adds Reynolds: “Units in this development are extremely well priced and ideal as an investment acquisition. To be able to purchase a new two bedroom unit of this quality and price represents exceptional value. The developer purchased an old property and rezoned and redeveloped the site. Right now we are definitely seeing developers re-entering the market and demand is high for units such as this.”
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