When investing in property with a view to a sound medium to long term proposition, there are a number of key criteria or ‘rules’ one needs to bear in mind, says Elwyn Schenk, Pam Golding Properties area principal in uMhlanga and eMdloti on the KwaZulu-Natal north coast.
“Firstly, decide on your investment strategy. It is important to identify your reason for the purchase – is it for a family home, buy to let, or buy, ‘fix up’ and sell. This will have a bearing on the term for which you will hold the investment and your expected return. Normally property investment is of a longer term nature, mainly because turnaround costs (transfer duties, fees, moving costs) are relatively high relative to the acquisition cost.
“Then you need to identify the geographic areas which will maximise your capital growth and rental yield. Obviously your budget will determine the price you are able to pay and therefore the sectors in which you look.”
Research the market
He says that experienced estate agents are an excellent source of information and will gladly assist with your research and help determine a reasonable value for the property in which you are interested. There are also several websites which you can access to find historical information on registrations and pricing.
“Your research should cover suburbs which are growth areas for reasons of shifts in demography, for example uMhlanga, where there has been an injection of business from the city centre, or eMdloti, much sought after for holiday homes and because of its convenient access to the new King Shaka International Airport.
“Bear in mind that due to a shortage of rental stock in most suburban areas, excellent rental yields are being achieved, in the range five to nine percent (ungeared).”
He says before presenting your offer you should carefully inspect the property for any defects. “As immovable property is normally sold ‘voetstoots’ (although the seller is obliged to advise you of any patent defects about which he/she is aware), it is a good precaution to make your offer subject to a qualified building inspector’s report.
“In the case of a sectional title property, examine the latest audited financial statements carefully, and study the accompanying budget for the ensuing year. If in doubt, talk to the managing agents of the body corporate about potential special levies or other major costs to come. This is especially important in old buildings where ‘big ticket’ repair items are a reality.”
Location, location, location
Schenk says that conventional wisdom is that it makes better investment sense to purchase a more modest home in an excellent area than the best house in a lesser area. This has proven to be true time and time again.
Do not overgear
Adds Schenk: “Gearing represents the percentage borrowing to the price of a property, so a bond of R300 000 on a R1 million property produces a gearing of 30 percent. A buy-to-let investor will typically maximise his/her gearing as in most cases losses on rental can be offset against other income (subject to certain conditions). This serves to substantially increase the yield on the investment.
“However, it is important to ensure that there is a safety margin in your gearing. When calculating your bond repayments, allow some scope for a two percent or more increase in interest rates for safety, especially in times of a rising interest rate curve, as we have now. In time rental escalation should more than make up for higher interest rates but it is in the early stages of a property investment when the numbers are most vulnerable.”