Impact Partner Content: Absa / by Matthew Edwards
The idea of investing in residential property is considered so intimidating by some, it’s often avoided entirely as a vehicle for wealth creation. The thought of finding the perfect property, applying for a sizable loan, navigating taxes and transfer duties, and finding an acceptable tenant, is enough to make any aspiring new investor turn to easier options – with far lower barriers to entry and less commitment.
If you’re new to the residential property investment game there are a number of factors to consider before making the leap. You have probably heard that property is all about ‘location, location, location’ and this rings true. Finding the right property (perhaps try shopping for a home like an economist?) in the right area is key, as some areas are considered reliable options with fairly stable growth (think leafy suburbs with secure neighbourhoods, great schools, good transport links etc.), whilst others may be inherently more risky, with greater growth potential in the short term (think up-and-coming, inner city apartments in areas currently undergoing rejuvenation). You also need to be sure you can afford to finance the property and that your current budget allows for what can be a very large upfront investment. You want to try and get finance that requires as little of your own funds as possible, with loan repayments that will mostly be covered by the rental income.
Who do you need in your property team?
Lawyer - to handle lease agreements
Accountant - to manage your cash flow on the property and maximize your tax benefits.
Tradespeople - to maintain the property, such as plumbers, electricians, etc
Property investment differs from other investment vehicles in three key ways. Firstly, it requires a much higher upfront investment, often requiring a down payment of over R100 000 for a deposit and conveyance fees. Secondly, it is less liquid than other investment types, so you won’t be able to get out of your commitment as quickly or easily, and you’re usually in it for at least three to six months, with the possibility of no return on your investment before then. Finally, property requires a level of management and oversight that other investments don’t; you need to look after the property and ensure the tenant is happy.
That being said, property does have many benefits over other forms of investment. You will likely be able to get a loan to invest in property, whereas you won’t get a loan to invest in shares on the stock market! Let’s say, for example, you have R100 000 to invest. You choose to buy a R1-million property, using your money as a deposit, where you then take out a R900 000 home loan for the balance. You will now see growth and returns on a R1-million investment, instead of on just the R100 000, had you used that to buy shares: essentially, you’re unlocking 10 times the value on your available investment funds. This is commonly referred to as gearing.
Visit https://blog.absa.co.za/category/money-matters/residential-property-investment/ for a full article.
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