8 Things You Need to Know When Investing in Property
More and more property rental signs are popping up on street corners and large developments. The reason: Property investment has become the playground of those in the know. However, whilst one might think buying a property and renting it out is an easy feat, there are many things to consider before signing on the dotted line.
1. Location, Location, Location
The first thing to consider when looking for a property to invest in, is its location. Study the crime statistics of the surrounding area, as safety is the number one deciding factor these days. Also, consider the area’s building density. On the other hand, you might also find value in determining the likelihood of further future development in the area, as that is likely to increase property value. Ultimately, the trick lies in finding a property in a popular area, selling at a low price. That way, you can maximise your profits down the line.
2. Property Types
Property exists in all sectors of the economy. Deciding which type of property you want to invest in comes from knowing your expectations. Investopedia says for residential properties, proximity to schools, shopping centres, amenities and green spaces would increase its favourability amongst tenants. There is always a market for residential property rentals and buyers.
When it comes to commercial properties, you’d want it to be near residential areas for the customer base to be strategically convenient for business. Ideally, you want to choose an established area to guarantee future return on investment.
Industrial properties are preferably near highways, cargo outlets and distribution centres to make life easier. An industrial property in a city centre isn’t likely to do well. Finally, the company which you are renting the industrial property to is also important to consider.
3. Types of Property Investment
According to Discovery, there are three main types of investments in property from which to choose: Direct investment, investment in listed property shares or property unit trust funds (or real estate investment trusts).
The first involves the most popular investment type where you buy to live, lease or sell. It is a direct property investment, as you are paying or receiving money on a monthly basis yourself. Most people cannot buy a property cash, so we require a bond from the bank. A person with a higher credit score has a better chance of being granted a loan of high value and lower interest rates.
The second type of property investment involves buying listed property shares on the stock market. The company in which you bought the shares then makes the decision on which properties to buy or sell on your behalf. Income is in the form of share price or dividends.
Lastly, property unit trust funds or equity REITs favour a partial investment over full ownership. This is also managed by a company that pools large amounts of investments from multiple people to invest in one scheme.
4. Quality of Property
Once you have decided where, what and how, it is time to consider the quality of your investment. For the purposes of this article, we are focusing on the direct investment route.
The best question to ask yourself when considering investing in a property, is: “Would I live here?” If the answer is no, then don’t go ahead. If the answer is yes, you have found yourself a winner.
Quality properties might come at a higher price, but the resale value and return on investment is bound to be higher too. This can also sometimes guarantee that tenants will respect the property as much as you would.
5. Retail Value VS Market Value
Private Property defines retail value as the price at which a dealer would sell the property. The market value is how much the property is worth or how much a buyer would pay for it in an open market.
As an investor, you want to buy a property with a high retail value, but one that has been listed at its market value. You want to buy as low as possible to be able to sell at a higher price and maximise profits.
Understanding property market trends is important for this decision. Standard Bank explains that if the South African Reserve Bank announces increased interest rates, the property market demand is bound to decrease due to higher costs. This results in a lower price for your buy-in, but it means you might have to increase your rent to repay your bond sufficiently.
6. Replacement Value
Now, here comes the hard question: “Do I buy something, or do I build it?”
Replacement value is the amount it would cost to replace something in its current state. However, property is one of the only things in life to appreciate in value. That means the longer you wait to resell a property, the higher the replacement value will be. Eventually, you can sell your property at a profit-making price.
7. Real Estate Market and Trends
The current property market in South Africa is a fluctuating one, according to Investec. However, one can comfortable say that there is a higher demand for property rentals than property ownership. This is good news for property investors.
Gauteng is known as a buyer’s market due to its high concentration of residential, commercial and industrial areas. KwaZulu-Natal is less well off due to the decrease in tourist numbers and emigration to other provinces. Of course, the Western Cape has a great property market, but it comes at much higher premiums due to the increase in demand from tourists, residents and corporates alike. What you would pay for a four-bedroom apartment in Johannesburg is equivalent to a two-bedroom flat in Cape Town.
Choose when to buy and when to sell wisely as trends affect property prices immensely.
8. Risks and Rewards
The property market is an unpredictable one. Therefore, as an investor, you need to manage your expectations so as to not find yourself in a pickle. Firstly, never over-gear. This means to not take out too high a bond from the bank that you struggle to pay it off. Secondly, property investment returns long-term passive income. Cash flow will not improve immediately, nor will your bank account gain weight overnight. Thirdly, Better Bond recommends budgeting for all possible costs. These come in the form of a deposit, maintenance or upkeep, rates, taxes, levies and interest on rent income.
Overall, the property market is a sure place to invest your money as long as you manage your expectations correctly. Research into the market trends is also invaluable as it will ensure you invest in the right property at the right time. While we have given you eight things to consider, the world of property investment is an unlimited one. Advice from a property or real estate agent is always a safe bet.
