Buy-to-let is no longer the hot property it once was and many investors who bought in recent years have struggled to get decent returns on their investments. A huge misnomer spread by the general media exacerbated by so-called property experts including bankers, attorneys, estate agents, property managers and the many more so-called property professionals out there is that the only method of investing in residential property is buy-to-let. They categorise investors into 2 main categories, either you are a buy-to-let investor or you are a speculator.
Speculation is viewed, as a bad investment methodology as it is short-term and is equivalent to gambling. Buy-to-let which was traditionally promoted as a passive way of investing. is typically viewed as a good way of building up a retirement nest egg but recently is filled with multiple challenges for ill-informed investors.
When investing an investor should ensure they have good reasons to invest first and this 7 point checklist is what an investor needs to do to get started:
Know what you want from your investments
Know the market
Get knowledge on the gearing of properties
Listen cautiously to the so-called experts in the market
Know when to use capital gains as a strategy
Understand the risks and rewards as an investor
Strategise your income streams based on market dynamics
Strategies can change according to investor needs at any given time in the life cycle of investing. The last 2 years in particular have been tumultuous times for many residential property investors. Cash flow has suddenly become the Holy Grail for many unsuspecting investors with highly geared properties reliant on maximum rental income with high shortfalls. The start of the uninformed investor problems came with the introduction of the National Credit Act, coupled with rising interest rates which eventually dropped to current 30-year lows of 9,5%. This made little difference to the market as refinance, which was a major finance tool used for propping up cash flow has dried up. Banks have stopped lending to the over exposed investor who needs much needed liquidity as well as slowed down on granting new loans. This has therefore forced investors to look at new ways of creating finance.
There are a variety of strategies within the traditional buy-to-let investment process. Investing in property is an active process and some of the multiple strategies that an investor can apply include the following:
Buy and hold (and refinance every few years)
Buy and ‘flip’ (quickly reselling it) in the same market
Buy, renovate and sell
Rent-to-Buy (option to buy on contract in the longer term)
Alienation of land act (property is transferred into the buyers name at a later date)
On selling contracts (vendor finance where there are deferred loans on the property)
There are few options for the highly geared investor, and sometimes even astute investors end up in financial trouble as a result of being retrenched or their business closing down. The additional financial burden of increased levies on sectional title properties, increased rates and taxes, high electricity costs, steep maintenance costs, low property value growth and defaulting tenants have resulted in many a property investor’s portfolio being jeopardized. As a result the distressed market is picking up momentum and many investors are forced to sell at all costs to recover their investment. 16 weeks is the average time it takes for a property to sell via an estate agent so turning your distressed investment into cash is a slow and difficult process.
Cash rich investors are stuck with multiple opportunities and choice that they sometimes end up doing nothing. The slowdown in demand in residential property means the normal willing buyer and willing seller model is under strain. Discounts between 40 – 60% are not uncommon on the auction floors and it is bringing back the property trader and the more seasoned long-term investor looking for longer –term value. Only 18% of sellers are getting their asking prices.
Distressed buy-to-let investors, homeowners and holiday property owners drive this below market value trend while bank finance is scarce. The challenges of limited bank finance are being replaced with creative investor financing. Flipping of properties to willing bargain hunters with cash is the order of the day. Cash buying is on the increase but is still a small market in volume terms. Those without cash are forming JV’s to finance the property or use ‘vendor’ or owner finance or make a quick profit on the turn of the sale. This is not speculation as some would term but rather a creative way of creating much needed finance in a cash tight market.
10 sure-fire ways to ensure that you derive value from the market through value investing is:
Research the market thoroughly
Identify an area which has high growth potential
Do the math – know the bond and property overheads and budget for the worst case scenario
Shop around for bargains – there are many
Understand tenant market demands when buying
Invest for income first not capital growth
Look further afield for better deals whether in another province or even offshore
Negotiate on price as there is additional value
Get to know all the pitfalls of investing so that you can counter this in your strategy
Decide whether you are going to be hands-on or hands-off on your investment
Like any investment investing in property comes with no guarantees but those who have faith in bricks and mortars versus shares always win in any market provided they apply the fundamental principles of investing.