Advice and Opinion

Why real estate should be your first choice investment

Real estate may not be your only investment, but it is certainly a great place for most ordinary people to start building wealth, says Rawson Property Group Managing Director Tony Clarke.

“Some of the wealthiest people in the world made their money in property – including more than 130 of the people on the Forbes Billionaires List – and collectively, those people known as UHNWIs, or ultra-high net worth individuals, own at least US$3-trillion worth of residential real estate,” he notes.

“In fact, the latest statistics show that on average, the 200 000 UHNWIs now spread around the world have about 20% of their wealth invested in real estate, and each own three or four luxury residences in addition to their primary home”.

“However, the really great thing about property is that you don’t need to be a millionaire to start investing. You can get started with just one small apartment in an area where there is good demand for rental accommodation.”

“What is more, if your credit record is good and you have a deposit, you can usually borrow the rest of the price of your first purchase from a bank, which is something you cannot do if you want to start investing in the stock market, or gold coins, or other collectables such as art or wine or super cars.”

Clarke says, real estate is similar to most other types of investment , though, in the sense that the longer you hold on to it, the more valuable it is likely to become – and the more likely you are to make a good return on your investment. “For example, if you purchased a property in 2007 and were then forced to sell it in 2008 because of the global financial crisis, you very probably lost money on the investment because of the sharp drop in property prices almost overnight.”

“But if you were able to keep the property, the chances are good that it is now worth considerably more than you paid for it, because property values have been rising again for the past five years and in most cases are now higher than before the crash.”

“Alternatively, the latest figures from First National Bank show that if you could have bought an investment property at the start of the last boom – about 15 years ago – and been able to hold on to it until now, it would currently be worth around 65% more than you paid for it, in real or after-inflation terms.”

Meanwhile, he says, you would have been earning rentals from it that would hopefully have covered most or even all of your monthly home loan instalments. In other words, someone else would have been paying off the purchase price of your asset while you enjoyed the capital growth.

“And on top of that, with the bond soon to be paid off, you would be able to look forward to the monthly rental becoming an additional source of income – and also to owning an asset that will continue to appreciate, which you could leave to your heirs, use as collateral to acquire other investments or sell to raise cash and trade up to a bigger real estate investment.”

In other words, says Clarke, the fact that one can borrow most of the purchase price at the outset is really not the only factor that makes real estate such a great proposition for the smaller investor.

“In addition to those already mentioned, there are tax advantages when you own rental properties – and a geared purchase means that if you do decide to sell an investment property that has increased in value, you get to keep this whole profit, not just the proportionate increase on your deposit”.

“As a simple example, if you bought a R500 000 property with a 10% deposit (R50 000) some years ago and the property is now worth R1 million, you will be left with a profit of around R500 000 once you’ve sold it and paid off the remainder of the home loan and any Capital Gains Tax. Thus your initial R50 000 “investment” would be multiplied about 10 times – and there are few other investment avenues that can realistically offer the individual without a lot of capital that kind of return within a few years.”