Invest With Your Head Not Your Heart

Private Property South Africa
Lea Jacobs

Knowing what to buy and when to buy it are always going to be key to successful property investment, particularly if the buyer is looking at building up a property portfolio. So what is the better option - to sink all your money into a single, large purchase, or to add a bit of variety and invest in a number of smaller, less expensive homes?

While one would assume that the income derived from renting out a bigger, more expensive property would automatically be more than that from renting out two or three smaller units, according to Bill Rawson, chairman of the Rawson Property Group, this is not always the case.

"I am not going to advocate totally shunning expensive residential properties," says Rawson, "because in my experience, every now and then one is able to sell such homes at a very substantial profit simply because, for some reason, they have aspects which appeal to certain buyers who are then prepared to pay a premium for them. However, right now in South Africa, it is the smaller units that (a) appreciate in value the fastest and (b) earn the best rents in relation to the capital outlay.

He says that two R1-million units will probably give a better return than one at R2- million. Similarly, three at R700,000 will probably bring in a better return than one at R2,1 million.

"With one unit the risk is focused and concentrated on a single tenant, but spreading one's risk is one of the oldest and wisest investment strategies and has always been favoured by landlords."

In the current conditions in South Africa, the landlord is sometimes approached by three or four people (especially young people) to split the rent and bill them individually. This, as Rawson points out, can be dangerous because all too often, one or two of the signatories to the lease default and their co-tenants are either incapable of making up the shortfall or do not feel obliged to do so.

With that in mind, he says that it is essential to have one person accepting the responsibility and being accountable to the landlord.

When asked why he remains such a proponent of residential property when the returns (on average around 5 percent after cost deductions) are half those of commercial property, which today can easily earn a 10 or 12 percent return, Rawson said that the danger with commercial properties is that if and when a tenant leaves or defaults, it can take months - or even years - to replace him. By contrast, the demand for residential property is so great that new tenants can almost always be found within a month or two.

It goes without saying that anyone investing in a property, regardless of the motivation, needs to conduct thorough research on both the property and the area in which it is situated before they buy. Many people who have invested in a holiday home in the hopes of paying it off in a relatively short period because the demand for accommodation is high, may well face a wake-up call when holidaymakers go home and they struggle to rent out the home during off-peak periods.

Similarly, not all areas are 'in vogue' and although the price may be right, the amount that can be charged to let the property may not be.

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