Building a property investment portfolio - Part one

Building a property investment portfolio - Part one

Private Property South Africa
Kerry Dimmer

Traditionally South African’s have grown up expecting to own their own homes at some point. Although this cultural affiliation to property ownership is still strong, the youth are beginning to take a different perspective. They are not as entrenched in having a home base because technology allows them to be mobile and thus still earn an income.

Yet at some point, they are likely to want to raise a family, and it has been psychologically proven that children thrive best when they have a stable and constant environment, surrounded by the familiar.

Regardless of reasons to own, or not own, a home, or homes, property is impacted by many factors. Miguel Martins, Portfolio Manager: Investor, Absa Home Loans explains that regardless of where in the world, property investment decisions will always be influenced by the economic frameworks of the host nation.

“For any property investor there is a need to understand the laws in a country, and even the by-laws in a region. The best investment you can make in a property is knowledge; and that in itself can be extensive.

“However, what property has that other investment products don’t have is that, in time, you have an asset that will always have a value. But it does require a good plan.”

Few people sit down to plan a strategy around their financial future; goals yes, which usually includes wanting to pay off a home loan within a number of years, saving for children’s education, perhaps even starting a business one day. To be financially unburdened or to have a future that is financially secure may seem like a dream yet becoming a successful property investor is a popular way to achieve financial freedom.

Martins confirms that some people enter the property investment arena by ‘accident’. “Some people will purchase their first home for themselves, live in it for a few years, and then buy their next home with a spouse or partner. The first home is then let out as an investment property”.

“This can be a great start of a property investment portfolio, especially if the first property is purchased with that in mind”

A property investment takes time to realise wealth. Ideally, with an investment in education up front and by applying a good strategy, properties should increase in value over time. But even if you have a vague idea of how you are going to build a portfolio, and even if you gung-ho your way luckily and successfully through your property acquisitions, at some point you may flounder without a plan.

“Like any business, an investor should consider various strategies to achieve desired outcomes,” says Martins.

The first step is to review the following key elements:

Your intentions: are you looking for a passive income flow, or do you want to make large profits once or twice a year?

Financing: will you be able to obtain finance to enable you to purchase a property or do you have access to alternative sources of finances, such as private investors?

Equity: how much cash is required to action your strategy, and do you have sufficient funds to do so?

Tax: Do you understand the tax implications of your strategy, and how best can you structure your property portfolio to be tax sufficient?

Education: What level of learning do you have about the market, the laws that apply to you and your tenants, and can you effectively work within those requirements and compliances?

Assuming these elements have been considered, the thinking and planning should not stop. The next step is to consider the different property strategies that have proven extremely successful over the years. This includes whether you a) want to build a rental portfolio, b) buy, renovate and sell properties (also known as a FLIP strategy), or c) buy, subdivide, build and sell ,” says Martins. He clarifies these further:

Rental Portfolio

“Find an area where rentals either match or exceed the monthly costs of owning a property.

Invest time in waiting for sellers who want to sell quickly, and will accept a lower offer. This method is slow but builds up a solid income base over time.

FLIP

“If you’re going to FLIP, even if turning around a property every six to nine months, it is going to require a fair amount of cash investment to fund any renovations with the expectation that once sold, a higher price can be realised. Here the focus tends to sway towards freehold properties – houses – in up-and-coming areas. And, if this is your strategy, I highly recommend consulting with an accountant, to advise you on how to structure yourself for tax purposes.

View pro tips on how to flip a house for maximum profit

Buy, subdivide, build and sell

“The more experienced investor, who understand the ‘development process’, will consider larger properties that can be subdivided, developed as separate and individual properties, and then sold to buyers. This strategy requires a good understanding of the town planning processes involved, the time to progress through the various development stages, and the associated costs.

Rent-to-Rent – a bonus strategy

“This type of strategy requires no purchase at all. An investor signs a property lease and is able to sublet the property at a higher rental amount, therefore benefiting from an increased rental amount.”

See part two here.

Share:

Found this content useful?

Get the best of Private Property's latest news and advice delivered straight to your inbox each week

Related Articles

Building a property investment portfolio – Part 2
Everything you need to know about building a property investment portfolio - Part 2.
2021 (Property) resolutions your future self will thank you for
Property resolutions you should adopt in 2021 to make your property journey as seamless as possible.
Advantages of living in a smaller home
Why moving to a smaller home can be beneficial