The first rule of property investing is: Switch off your emotions. Investing requires a very different mindset to when buying a home to live in. Your own likes and dislikes matter less, as they may cloud your judgement.
‘Novice investors often get caught up in details such as the style and finishes of a property, or their personal preference for a certain neighbourhood,‘ says Sean Godoy, director of Divercity Property Solutions, a Joburg-based property consultancy. He says: ‘While these are important factors when buying your own home, they have no place in your investment strategy.
‘You wouldn’t get emotional about selecting unit trusts or a pension plan, so treat your property investment with the same financial pragmatism. Think about who is going to use the property, and which location and type of housing are most in demand and likely to generate the best returns.’
The beauty of an investment property is its ability to produce a passive income while, over time, appreciating in value. Smart investors can deduct expenses, reduce their tax burden and use property as a hedge against inflation. It’s also an increasingly popular vehicle for portfolio diversification, in line with the adage of not putting all one’s eggs in one basket.
Historically, it’s always been reassuring to own a bricks-and-mortar dwelling, because it’s a tangible, immovable asset that symbolises stability in volatile times.
It’s paramount to begin the investment journey with a plan. ‘This must include all of your personal goals, investment strategies, target area for investment, type of properties, type of buyers, tenants and investment structure, and consider asset protection, tax efficiency, estate planning and bank lending,’ says Warren Brusse, a professional property investor and coach who co-founded the SA Property Investors Network.
‘Your personal goals will come in the form of cash-flow goals from income properties, cash-generation goals from capital flip projects and capital-raising goals either from self-funding or from other people’s money,’ he says.
Obviously your risk appetite and time frame also play a role. Income properties, which provide the owner with a rental income, necessarily require a longer-term investment, which translates to lower risk but plenty of patience.
Capital flip projects, on the other hand, are short-term property transactions in which an investor buys a property to sell it for a quick profit. They carry a higher risk because they involve more complex transactions (buying as well as selling) and more role players, usually required for financing and typically also for renovating the property.
When ‘flipping’, you need to work with credible estate agents, project managers, building contractors, and possibly fellow investors, says Brusse. ‘While it’s always important to concentrate your efforts on purchasing the property at as low a price as possible, it’s equally important to sell the property at a fair market value as quickly as you possibly can in this tight buyer’s market.’
He urges investors to crunch the numbers, taking into account the purchase price, buying costs, holding costs, financing costs, selling costs and potential profit.
When, where, what
Another key aspect is timing – where you buy, and when. ‘Try to find an area that’s just starting to become popular, like Sea Point on Cape Town’s Atlantic Seaboard about 15 years ago, or more recently, Woodstock and Salt River,’ says Godoy. Those who invest early in up-and-coming areas will benefit from the rapidly rising property values as the neighbourhood gains popularity.
‘Do your research,’ he adds. ‘Speak to people on the ground – developers and estate- and letting agents – but take this with a pinch of salt, as they may be focused on a sale. Also check property websites, relevant statistics and any other available information to identify a good location and gain an insight into the market.’
As a starting point, Godoy suggests investing in a one- or two-bedroom buy-to-let apartment. ‘Residential rental property will always remain in demand, because people have to live somewhere,’ he says, adding that smaller flats tend to be in high demand by young professionals, couples and people who want to share. They are also more affordable to finance and are usually easier to maintain than bigger properties.
Passive or active
If being a landlord sounds like too much legwork, you could also try Real Estate Investment Trusts. Known as REITs, they are JSE-listed property funds that offer you the benefits of property investment without physically having to purchase or manage a building. They primarily invest in commercial property (shopping malls, office buildings, warehouses, hotels), but increasingly the residential sector too – locally and offshore.
Hands-on investor Brusse is personally involved in buy-to-let as well as multi-let investments in the UK, and in capital flips and development projects in South Africa. ‘I’m a very big believer in continuously investing in both the local and offshore markets,’ he explains. ‘Locally, we are definitely in a strong buyer’s market, which is presenting great opportunities to property investors.’
Just be sure to do your homework, calculate the risks and remove your emotions before investing any money.