Property is considered one of the fundamental parts of any well-diversified investment portfolio. For many people, the idea of an “investment property” is one that generates some form of income, usually through rental, that covers most of (if not all) the property’s expenses.
The nice thing about investing in property, especially a buy-to-let strategy, is that it’s something we all understand. Other forms of investment, like stocks and shares, are often confusing – but owning a home is something we can all relate to.
When you’re looking to invest in residential property, you have a few choices you need to make. Most importantly: how do you plan to finance the investment? If you’re one of the lucky few who can purchase a property as cash, then you’re all set to go. However, the majority of investors would need to get a home loan.
If you do require a home loan, you need to take the following into consideration:
How much the bank would be willing to lend you – this will set the tone for where you house hunt, and what kind of property you can afford
Do you have a deposit – having a sizable deposit not only helps lower the amount you need to borrow, but it can also help secure a property while other interested parties look for financing
The added extra costs – buying a home comes with added costs like legal fees, registration fees, transfer duties and the actual cost of the property (rates, water & electricity, insurance)
Your current expenses – can I afford the cost of the bond repayments, in case there are times without a tenant. It’s very important you are able to service your loan for a period of time in case you are tenant-less at any stage.
Once you’ve figured out all the nitty-gritty finance stuff, the fun starts - house hunting. Before you head out, give some thought to what kind of property, and where, you want to buy.
By looking to invest in established areas you know people want to live in, you increase your chances of finding tenants and earning regular income. However, these homes are often priced close to, or above, their maximum value. This means any rental income you get from letting the property out could potentially fall short of covering the total bond and home expenses.
Despite this, by investing in a well-established area you do score one of the fundamentals of property hunting: location, location, location. By investing here you not only know it is a desirable area, but one that has a proven track record. This means that the property prices in that area have steadily grown over time, making your investment a little more secure. It also means your chances of finding tenants, and ultimately buyers one day, are much higher.
When looking in established areas, be mindful of school catchment zones and the other nuances such as zoning. If you fall into a good school catchment zone you will immediately attract families needing to live in the area to gain access to those schools. Zoning regulations also open you up to possible development opportunities. For example, if your property is zoned for residential and business, or has permission to be extended more than two stories, you could look to develop the land later on.
The joy of buying into a new development is exactly that – it’s new. Not only do you know that everything will be under warranty for the foreseeable future, but you could potentially have a say in the finishes that go into the property. Buying a new development off-plan will also save you a lot of money as you will avoid legal fees and transfer duties.
Gated, townhouse complexes and golf estates are becoming increasingly popular in South Africa due to their increased security levels. Buying into a new development comes with other perks, such as an on-site caretaker who looks after the grounds, a body corporate who ensure the property is well run and governed correctly, and the fact that you part of a small community of owners and investors who all want the best for their investment.
While these kind of developments are often found outside of traditional, established suburbs, this is not a hard and fast rule. If you’re not in a rush, keep an eye out on your preferred areas as new developments go up every day.
When looking at buying a holiday home, you should consider the dual nature of it being an investment, as well as a family retreat. This investment could be in the guise of buying in an up and coming, increasingly popular area, ensuring your property has the maximum chance to increase in value.
Alternatively, it could be buying in an established area and leveraging the rental income throughout the year to pay for the property. With the massive up surge of easy rental options like AirBnB, it is very feasible to pay off a bond on a holiday home and still get to enjoy it yourself.
When investing in property, always be aware that it is exactly that – an investment. Most investments are long-term projects, only realising their true growth potential several years into the future. Keep the long-term nature of the investment in the forefront of your mind, and always be aware that there are risks involved in any form of investing.