Hints and Tips for Investing in a ‘Difficult’ Market

Hints and Tips for Investing in a ‘Difficult’ Market

Private Property South Africa
Lea Jacobs

All predictions indicate that 2012 will be a year of crises for property around the world.

Despite this, in these times of uncertainty astute property investors will turn a profit by taking advantage of the opportunities presented by the market. Although many South Africans will sit in the stands waiting for the referee to blow the whistle to indicate that the market has bottomed out, clever investors aren’t waiting for the whistle, but are keeping a sharp lookout for investment opportunities that have been created by the current buyer’s market.

Here are some of the tips and tricks that such successful investors use to increase their property wealth.

Invest, don’t speculate.

Many property investors think that they are investing when they are actually speculating. This usually involves buying property emotionally; for instance close to where you live, go on holiday or want to retire. After this you can only hope that the market will appreciate. This means that any profit you make is completely dependent on outside market conditions.

Astute investors don’t do this. Their investment is an educated one based on research. They are always on the lookout for properties selling below their intrinsic value in areas where there is above-average, long-term growth. Thereafter, they add value by upgrading, thus creating additional capital growth.

Good investors don’t make rash decisions.

They surround themselves with competent advisors. They can quickly recognise the difference between sales talk and good advice and they will seek out agents who give them the latter. They also know that the biggest risk doesn’t lie in the actual property, the market or other factors outside their control. The risk actually lies within: depending on the investor’s knowledge, experience and overall mindset. Many successful investors also specialise in a certain type of property and become experts in their field, refusing to diversify.

It’s about property not glamour.

Wise investors always buy the best property they can afford in proven growth locations. They do not allow themselves to be tempted by attractive financing opportunities or tax strategies.

Property investment is about high growth and low yield.

The age-old argument about whether it is better to have capital growth or cash flow doesn’t side-track savvy investors. They already know that the quickest way to acquire a substantial property portfolio is through capital growth.

Land values appreciate.

Generally, land appreciates in value, but this is not a simple process. Not all land is equal and different types of land will appreciate at different rates.While there is an ample supply of land in outlying suburbs, only a small segment of the market wants to buy in these areas (such as first-time buyers). This restricts demand and capital growth, often making such areas poor investment prospects.

Bear in mind that the land component of a property, the part that appreciates, usually only constitutes roughly one-third to one-half of the total property value. In suburbs closer to major commercial hubs the ratio of the land value to the total property value is usually much higher. Scarcity of land is the factor that causes property values to keep increasing in these sought-after suburbs. This is why the trend is towards strong demand for ownership and rentals in built up urban suburbs. People want to live close to the workplace and have access to amenities like shopping and entertainment. Because of this, inner suburbs are where astute investors place their money for long-term capital growth.

Buy property in areas where there is strong, on-going demand.

Obviously, not every property in the better suburbs is an ideal investment that offers capital growth. Investment-grade properties are the kind that appeal to a large group of potential owners/tenants; the latter group represent the vast majority of potential buyers. Savvy investors avoid studio apartments as well as student and holiday accommodation. It’s worth remembering of course that it is owners and tenants who raise property values in the long term, not short term tenants.

Demographics affect long-term returns.

Where and how people want to live sets the trend for the type of property that will be in demand in the future (when the investor decides to sell). This is particularly evident in South Africa where there has been an explosion of secure estates to circumvent the higher crime risk. Astute investors watch demographic trends carefully.

Understand that the property market goes through cycles.

When there is a boom everyone is an optimist. During a downturn everyone is pessimist. The fact of the matter is that the property market is cyclical. Every boom literally sets us up for the next downturn and each downturn, although it seemingly lasts forever, is followed by a period of recovery and then a boom. Good investors know this and do not let it affect their mindset.


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