This article was written by Carol Reynolds, Pam Golding Properties area principal for Durban Coastal
Residential property has always been perceived as a relatively stable and safe investment which has demonstrated ongoing resilience as an asset class.
It’s a unique investment class because it is tangible and because investors are able to gear their investments with their rental income. Through gearing, and even syndication, small investors can get started with a relatively small deposit and in time, their asset base can grow into something of significant value.
If correctly geared, investors can leverage their property portfolio and effectively use other people’s money to grow their asset base. The first critical issue is to ascertain what type of property investment you seek. For example, you may be looking to flip for profit which is a shorter term investment strategy and involves securing a good purchase with potential to renovate and resell in a short space of time.
If this is your aim, then it is ideal to purchase a property that requires cosmetic changes rather than structural ones, as the key is to try and spend around 15 percent of the value of the property on renovations. If the renovations are extensive, and therefore expensive, you may need to hold onto the property for a period of time in order to maximise the gain.
If you are looking to flip, then acquisition costs need to be factored into your sums, and capital gains tax also needs to be taken into account. Ideally, you want to buy for under R2 million, spend a maximum of R300 000 renovating, and then achieve a gain on the resale of at least 10 percent of your total expenditure. Your sums need to include finance costs, transfer costs and then capital gains tax.
Looking at medium-to-longer term investment options, there are three key factors to bear in mind: risk, return and growth. As minimising risk is important, consider a diversified portfolio, or perhaps a portfolio with lots of little investments spread across a few nodes. If you have significant money to invest, then perhaps long-term capital appreciation is your main priority, in which case you require a solid investment portfolio in the most sought-after areas.
Tenant profiling is key. Statistics show that the most reliable tenants are those in the R5000 – R15 000 per month category. So from an investment perspective, properties that sell for between R1 million and R3 million are best from a rental return perspective. Try and find a sectional title unit with two bedrooms for under R1 million. Transfer costs will be little or nothing, because if you buy a home for R900 000 or below, you do not pay any transfer duty, and your tenant profile will be good. Put down R500 000 and gear the balance by way of a rental of at least R5000 per month. If your rent just covers your costs (or is slightly lower than your costs) then you will enjoy the tax benefit.
In time, your rent will escalate and if you can pay an extra amount of say R1000 per month on your bond. You will quickly reach a position enabling you to leverage this asset and use this access facility to enable you to acquire your second sectional title unit.
Readers are advised to seek professional advice from qualified advisors before making investment decisions