Property Investment: the ups and downs
Category Blog
Most people are aware that owning a home is probably one of the most important goals in life. For the security of tenure, there is no more crucial step to take as soon as one can. This primary home is possibly going to be many people's largest investment. However, adding property as an investment tactic in your financial portfolio is also a proven wealth-building choice.
Real estate appreciates over time - but there are always snags to look out for. Plain sailing is not always the experience you might enjoy - and if you want to become a property tycoon, making your fortune by flipping a property for a profit on a serious, professional basis, you need to take note of both the advantages and disadvantages.
The Ups of adding Property to your Portfolio
- Increasing value: Real estate can generally be relied on to grow in value over time, and often at a rate that outpaces inflation. The key is to choose the property in areas with good growth prospects. Even if the property requires improvements, you will definitely see a return on your investment if you are prudent and patient. Unlike the stock market which can fluctuate dramatically, property provides a more stable and consistent return on investment.
- Provides a steady rental cash flow: After all bills, rates, levies, etc, have been paid, the idea is to have an overflow of cash you can either invest in the stock market, or reinvest in your business by buying more property, or simply spending it as you wish on family, on holidays, on hobbies, etc.
- Real estate acts as leverage: Your property can be used as collateral to obtain loans, which if used wisely can grow your property portfolio through affordable down payments on new acquisitions, which in turn can grow your wealth exponentially. Leverage like this in a low-interest market can be invaluable in building long-term investment strategies.
- The way property works to build wealth: When you think about it, your tenant is buying your property for you; essentially paying down your bond each month, thus increasing your net worth each month. Your property acts as a kind of savings account that continually grows to your benefit without you depositing any money of your own.
- Using the value of other people's money: The ability to finance multiple rental properties with minimal cash outlay - and to get those properties producing income immediately - means that return on investment can happen quickly and consistently.
- Property gives you more control: Of all investments, property gives you the most control. You can't really influence the ups and downs of the stock market, but with real estate you can call the shots. You can extend your property stable, decree the best tenants, and make strategic decisions with regard to improvements that increase the value.
- A hedge against inflation: Prices increase over time due to the value of money decreasing, and the annual inflation rate varies. Inflation erodes the value of many investments. But the real beauty of real estate investments is that they keep pace with inflation. Property value and rents go up in tandem with inflation, but a fixed-rate bond repayment does not go up.
- Tax benefits: Of course, you will pay tax on rental income - however rental real estate is a business, which means that many expenses with regard to maintenance, or people you may employ to handle your administration, or travel costs incurred when you need to check on your properties, are tax-deductible.
The Downs of property investment
Money:
You're going to need a fair amount to begin with. While you can put down a small deposit in many instances, you must have the backing of a certain amount of money forthcoming. Apart from the down payment and closing costs, plus estate agency costs, you'll need money to repair and update the property to maximise rental income. And once you own the property, there will be ongoing expenses like property taxes, insurance, bond repayments that must be serviced, and property maintenance. You will also need backing should the property remain tenantless for a couple or more months.
Liquidity points to note:
Properties are not as liquid as stocks or other investments where you can pull out your money anytime you want. If an emergency happens and you need cash, you may not be able to immediately convert your property into cash in a quick sale. Also, when you buy property, you're not buying bits of it as you please as one might do with shares, you're buying the whole nine yards. And thirdly, bonded properties may experience trouble when interest rates start to hike - and monthly bond repayments may become higher than the rental charge.
Who will manage your property?
Are you going to manage it yourself? There will be a fair amount of legal red tape to work through - and this can consume your time. You will have to contend with teams of contractors, the banks, property managers, and other professionals. If you don't have a real estate background, you will need to familiarise yourself with a variety of legal, financial, and commercial concepts. Choosing the right company to manage your property must be done carefully. It's important to look at the impact a property manager will have on your profit margin.
Problem tenants:
Always the bugbear of property owners. Tenants can cause problems and cost you money and valuable time wasted in court. If your tenant doesn't pay, or leaves the property in poor condition, you have real problems to contend with. You need to be able to make monthly payments on your debt despite market dips, property vacancies, unexpected repairs, maintenance costs, and other expenses that are part of doing business when investing in real estate. The last thing you need are tenants that add to these issues. Unfortunately, it is a reoccurring theme in rental problems and has to be catered for.
Leapfrog Property Group
Leapfrog Property Group offers a fresh and innovative approach to buying, selling, renting and property investments, ensuring the best property deals for clients across South Africa. Our agents are qualified, trained, experienced; our approach bold and spirited, driven by heart, generosity and honesty. It is our mission to advise, eliminate obstacles and save you unnecessary expense. Trust is our watchword. And value our motto. Armed with our combined credentials, we are the bright face of excellence in the South African market.
Author: Leapfrog Property Group
