So you want to be a property baron? The best way to learn to be one is from one – like Johannesburg businessman and property investor Jacques Erasmus. Since 2002, Erasmus has acquired 10 investment properties, from residential to industrial and retail. For starters, you need to be clear about your investment criteria, says Erasmus. “Are you buying a property to live in or to let? If you’re planning on living in it yourself, you obviously need to rank personal comfort, lifestyle and affordability as tops.” When looking for buy-to-let properties, Erasmus rates proximity to CBDs or holiday appeal as important considerations. Properties positioned close to CBDs will always rake in good monthly rentals, and those with holiday appeal will generate seasonal rentals. “It’s also good to define upfront your return criteria, like timeframe, capital return and income desired.” He says that the value of the property will also determine transfer fees, and later capital gains tax and sale ability. “It’s a real bonus that you don’t pay transfer fees on the first R500K. That said, more expensive properties generally have a smaller pool of buyers so keep that in mind too.” Erasmus warns buyers not to overextend themselves. “Everyone tells you this, but I can’t stress enough how important it is to think about unplanned eventualities like tenant defaults and maintenance issues. These can kill your pocket if you aren’t careful.” When it comes to deciding where to buy, Erasmus says thorough research is necessary. “If you’re looking at two areas and the one has new infrastructure planned and proposed commercial activity in the future – both of which are indications of solid capital growth – you know which one to chose.” Erasmus says estate agents should have this kind of information at their fingertips. If not, contact the local municipality and chat to the town planners. When it comes to finding properties, Erasmus is keen on online portals and auctions. “I’ve made my best and my worst buy at an auction. Just do your homework so that you don’t land up with a lemon. My lemon was a property I bought purely on the outstanding bond. I ended up drastically overpaying.” For Erasmus, auctions work best in a buyer’s market. “With fewer serious buyers and forced-sale conditions, you’re guaranteed a bargain.” He warns those new to the auction scene not to overlook “hidden” costs like VAT and seller’s commission. “On a practical level, also watch out that you don’t get emotionally caught up in the bidding process. Stick religiously to your maximum bid. And understand that there are different types of auctions, so do your homework.” Buying off-plan into a development is popular among first-time buyers mostly because transfer fees and legal costs are usually worked into the purchase price. “Less capital might be required, but there are risks. Due to inadequate controls, an increasing number of sub-standard and unscrupulous developers have entered the market. Their work is inferior and that sometimes only comes to light months or years down the line.” Erasmus urges buyers to do some serious CSI-style research and background checks on developers before signing on the dotted line. Berry Everitt, the CEO of Chas Everitt, offers the following advice to those buying into developments: “If you’re buying a home in an established estate or cluster development, it’s important to bear in mind that the future value of your property will depend not only on its individual location and condition, but also on how well the development as a whole is managed by the homeowners’ association (HOA).” Everitt advises taking several cautionary steps before signing any offer to purchase in such a situation. Firstly, he says, prospective buyers should establish the percentage of owner-occupants in the community versus the number of tenants. “There is a good reason that banks are often reluctant to grant loans for homes in developments where more than a third of residents are tenants. They know from experience that resident owners are more likely to take care of their properties, and the communal areas and facilities, than landlords who don’t live in the community. Everitt adds that buyers should also ask to see the current assessment/ levy collection record, and find out what percentage of owners are 90 days or more in arrears with these payments. “If the percentage of delinquent owners is high, it means the HOA does not have an effective collections policy or procedure and, quite simply, that the management committee is not doing its job properly. Levies are needed to ensure proper maintenance of communal grounds, roadways and security equipment and if funds are inadequate to pay for this maintenance, all home values in the development will be threatened.” He says it’s important to find out if the HOA has a stated reserve fund requirement and how much it has in this kitty. Such a fund is vital to cover the predictable costs of repairing or replacing communal assets without having to raise special assessments, and should be funded from the monthly levies paid by owners. “A well-run community will have more than 75% of the reserves it needs in the bank, and lower levels generally spell trouble because the resistance to paying special levies may well result in necessary repairs and replacements being deferred, to the detriment of property values in the estate.”
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