1. What do you want to achieve?
Purchasing an investment property is a business transaction and is merely a bricks and mortar vehicle that enables you to achieve pre-defined financial goals. Before purchasing a property, it is important to identify your end goal and then formulate a plan to get there in a time frame that works for you.
2. Do your research
Research and get to know the area where you are looking to buy a property. Are there universities, hospitals, businesses or a transport hub close by? Establish the vacancy rates, your tenant target market – e.g. income bracket, student, professional, single, couple etc.
3. What is your preferred investment strategy?
Once you have done the above you need to implement an investment strategy. The difference between investing in property versus saving in a money market is that the former allows you to leverage your investment by borrowing money from the bank. Part of your strategy might be to look for a rental yield, capital growth or both.
4. What is gearing and how does it work?
The essence of gearing is using other people’s money (or financing) to increase the size of an investment in order to increase the returns on your own capital outlay.
An example of a successful gearing investment can be as follows: A buyer purchases a R2 million property off-plan before construction begins. The buyer puts down 10% of the purchase price – R200,000 – as a deposit and s/he uses R1,8 million of the bank’s money, in the form of a mortgage bond, for the balance of the purchase price. 18 months later, once the development was built and the property was transferred to the owner, s/he sells the property for R2,7million.
5. Property Management
Before you invest in a property you need to decide if you want to manage the rentals yourself or hand that over to an agent or property management service. The latter option will obviously incur costs that you won’t have if you manage your property yourself. As short term rentals such as AirBnB require far more time and energy than do long term rentals it is important to decide which of those two options suits you and the are in which you have decided to purchase a property.
6. Listed Property shares vs physical real estate
If you decide to invest in the property market without buying a specific property, you can consider purchasing SA Listed Property shares. Property companies, such as those that develop and manage properties of various types, are listed on the local and international stock markets and generally comprise the asset class know as ‘listed property’. Two of the biggest local companies are Growthpoint Properties and Redefine Properties.
This asset class gives investors exposure to a range of property classes including industrial, office, commercial and residential space. There are over 40 local property unit trusts, loan stocks and REITS (Real Estate Investment Trusts) listed on the Johannesburg Stock Exchange. They offer the benefits of real estate ownership without the problems of being a landlord, and unlike physical real estate, these shares can be quickly and easily traded.
7. Take the emotion out of the purchase
Work out the numbers and calculate how much the property will cost including repayments, rates and levies and work out the net yield after these costs. E.g.
Purchase price – R1,500,000
Size – 70 square metre
Cost per square metre – R21,428.57
Monthly rates- R500
Monthly levies- R2,000
Assumed rental per month – R8,500
Management fees @ 10% of rental -R850
Net monthly rental after costs- R5,150
Net yield – 4.12%
8. Set up or adjust your existing budget
As there are many expenses involved you need to do an analysis of these costs. Set up a monthly budget and ensure that if your property is not tenanted you will still be able afford the bond repayments.
9. Understand the risks
As with all things in a property purchase, buying an investment property is not without its risks. Some of the most significant risks are:
Ø You might not be able to achieve the rental income that you anticipate
Ø You could end up having to pay for expensive repairs
Ø Property taxes could increase
Ø Levies could increase or there could be a once-off levy to maintain the property
Ø The local market economy could change;
Ø You could have bad tenants resulting in repair costs or even eviction costs. It can take up to 18 months to obtain an eviction order at a cost of between R5,000 and R25,000 if the eviction is unopposed.
10. Restructure at your estate plan
If you have used finance or gearing to purchase the property, ensure that, on your death, your spouse is not forced to sell the property. S/he will more than likely need the rental income to continue. Structuring an estate plan and updating your will is an important aspect of financial planning. On your death, your spouse will require a certain amount of income to sustain his or her lifestyle, therefore you should consider increasing your existing life and disability cover to ensure that the property debt can be settled.