If you have vowed to make 2023 the year to build wealth and create a financial legacy, then you may want to consider stepping into the world of property investment.
Even if you do not yet own a home, you can still make your first brick-and-mortar purchase with the pure intention to make money from it, not live under its roof.
In fact, this year’s market conditions may provide a great environment to take this step.
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In the real estate world, there is a big difference between an investor and a home buyer, with Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa, explaining that the criteria by which the property will be judged will differ vastly depending on how you intend to use it.
“Those who intend to live in the home will need to find a property that suits their personal needs and should consider factors such as proximity to their workplace and schools, future plans for family expansion, and other aspects concerning the overall functionality of the home. Investors, on the other hand, are more concerned with wealth creation, and should therefore consider things such as average annual house price appreciation, area demand, and rental prices in the area.”
Whether you are a buyer or investor, however, you need to consider that unless you plan to flip the property, most real estate investments are long-term investment strategies that can take at least five to ten years to mature.
“If the property you purchase is not your forever home, you need to remember that it takes a while to build up enough equity in the home to help you climb the property ladder. There are also various costs that you will need to cover when buying a new home – such as transfer duties, and bond registration costs, and selling the current home, such as compliance certificates, a municipal rates clearance certificate, and an agent’s commission.”
Even if it is just a starter home, he recommends that you purchase a property you will be comfortable living in for at least five years. This will allow the market enough time to appreciate in value to help you afford the costs of upgrading to a larger home.
If your goal as a property investor is to set yourself up for future financial security, then Goslett also advises against prematurely selling the property before it has had enough time to appreciate in value.
“Perform the necessary calculations on what to expect on monthly rental returns to make sure that you can afford to hold onto the home for around five to ten years before selling.”
Even though interest rates have been climbing, Goslett believes that 2023 may present the perfect conditions in which to purchase more investment properties.
“All market indicators seem to point to house price appreciation slowing in 2023. If this is the case, it might not be the best time to sell, but it could present the opportunity to build out your real estate portfolio so that you have two or three properties benefitting from the solid long-term growth we are bound to see once the market recovers.”
Starting an investment portfolio, however, does not mean you have to buy property in order to let. Aspiring investors could purchase a second property for personal use, or even look at flipping it, which entails buying a property in need of TLC, renovating it, and then selling it for a profit.
Alternatively, if you cannot afford to buy in an area you would like to live, you could also consider buying a property in one you can afford, letting it, and using the rental income to pay your own rent in your desired neighbourhood.
Grant Smee, managing director of Only Realty, says that not enough people have been taking advantage of the lower interest rates to buy investment properties. The market over the past couple of years has very much been driven by first-time buyers, and homeowners either relocating, upgrading their homes, or moving for lifestyle and convenience options.”
Most of those who have been investing are either looking at the long or short-term rental market, the choice of which is made based on the property’s location.
“Areas that are popular for short-term rentals are busy coastal hubs as well as business hubs facilitating regular business travel.”
Investors obtaining holiday homes or buying for the purpose of flipping, he says, only make up a small portion of the general property market.
However, in areas like the West Coast of the Western Cape, the Garden Route, the Eastern Cape outside PE and East London, and KwaZulu-Natal’s South Coast, “a significantly larger proportion of property purchases would relate to holiday home purchases, although these markets would still be driven by semigration”.
Ultimately, property is still seen as a lucrative asset class and, if financed correctly, can become a great source of passive income.
“In other cases, some want to purchase a holiday house for use at the end of the year, but want to derive income from the property when they aren’t there – so they opt for short-term letting,” Smee says.
Echoing this, Paul Stevens, chief executive of Just Property, says the most obvious reason people invest in property is to create another income stream, such as buy-to-let. In this space, there are residential and commercial options, as well as short- and long-term options.
“Another reason to buy a property without intending to live in it is to rezone or refurbish. With shifting working arrangements, this is something worth investigating in your area. Shared workspaces where people can ‘hot desk’, and the increased demand for homes that allow for established remote working, provide opportunities.”
He adds that rezoned and/or refurbished properties can be sold or rented for a profit if they are well-positioned, well-equipped, and well-priced.
Property investor Ben Malapile states that, of the approximately 6.6 million residential properties registered at the Deeds Office, more than 3.3 million are occupied by tenants. This shows just how popular buy-to-let property investment is.
In addition to intentionally buying property to let, some investors enter this market as a result of their circumstances.
“Some buy a starter home and, when the family grows, they decide to keep that home and let it. Some inherit properties from their parents, maybe try to sell, but struggle and end up renting them.”
As a result, he says the property investment market is made up of a large portion of unintentional landlords. Most landlords – intentional or not – prefer the long-term rental market.
“Only about 10% actually have the capital to commit to buying and running a short-term rental or owning a holiday home and running a short-term rental when they are away.”
Buyers of second properties bought as personal holiday homes are normally directors and shareholders of successful companies and other high-net-worth individuals, Malapile adds.
A higher number of investors – about 10% – buy with the intention of flipping. This, he says, has been spurred by the number of property-flipping shows on TV. Another reason people might buy property without intending to live in it is when they purchase for someone else, like children, parents, siblings, spouses and in-laws.
“Some buyers purchase farms and agricultural holdings to farm and sell their livestock but have no intention of living on them.
“Some buyers also buy property to let it to students as fully/semi-furnished student accommodation,” Malapile says.
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