Property is an ideal way to build capital. In the long-term, property has been proven to keep pace with inflation while giving investors returns of 5 to 6 percent.
And, unlike stocks or shares, investing in property enables you to put together a retirement nest egg without investing all your money upfront. This is because, apart from the initial deposit, most of the finance will come from your bank in the form of a mortgage loan.
However, buying an investment property is a big expense and a long-term commitment, so you need to know as much about the property and the local market as possible before taking such a big step.
You also need to be quite clear about your reasons for wanting to invest in property, as this will affect the decisions you make. You must be sure you’ll be able to let it and that there is good price growth in the area.
Most importantly, when buying for investment purposes, you must separate your personal tastes from those that will make the property attractive to tenants or future buyers.
Spread the risk
Most estate agents advise investors to spread their investment between two or three smaller - and cheaper - investment properties than on one larger, more expensive property.
This enables you to spread the risk in case you end up with a unit unoccupied for a period of time. So, for example, it would be less risky to have one unit with a R4 000 rental standing empty and one or two others with tenants than have one large R12 000 house vacant.
- Smaller units also usually cost less to maintain, especially if you buy into a new development.
- Sectional title units are good investment options as the common property is managed by the body corporate. This means you won’t have to be concerned with garden maintenance.
- Student accommodation and new developments can be good investments if you buy off-plan.
Location
Location is important as your return on investment will depend on the demand for the property. Therefore, when considering investment properties, look for the worst property in the best area.
- Smaller properties in good areas are a better choice than bigger homes in areas that are not popular with tenants.
- Keep in mind that a property that is close to public transport routes, as well as shops and schools, will attract more tenants. As a result, many tenants may be prepared to pay slightly more for this type of rental unit.
Finance
When you apply for a bond to finance an investment property, the banks will closely scrutinise your finances to establish whether you can afford the monthly bond repayments. They will usually require a significant deposit and will want to see details of your income and expenses.
Most banks won’t take potential rental income into account when considering bond applications. This is because they need to be sure that you can afford the repayments – regardless of whether the property is rented out or not. Most bond originator websites have calculators that will help you determine whether you can afford an investment property.
When setting up a budget, keep in mind the costs of refurbishment, maintenance, rates, taxes, electricity and water, as well as monthly levies if you are investing in a sectional title unit. You will also need to factor in insurance and security costs.
Additional once-off expenses include transfer duties and legal fees, so include this in your overall return on investment estimate.
Prospects
Property investment is one of the most stable investments you can make. People will always need homes, and there is little chance of losing value in the long term if you observe the guidelines of when, where and how to buy.
After a few years, you may be able to build up towards owning several units, which could provide a healthy income later. Alternatively, you could sell one or more of the units and live off the capital. In this case, you need to ensure that the interest earned from the capital amount will be higher than the rental received on the unit.
Writer : Sarah-Jane Meyer