When you say the words “investing in property”, most people only think about buying a home – or maybe even a holiday home – and watching it appreciate as the property market runs.
Few people ever truly think about the idea of using property as an income-producing investment… They think this is a time-consuming, difficult way to make extra cash.
But the truth is, it’s not.
In fact, do it right and you could easily generate 10.5% capital appreciation on your property as well as an extra 12% a year from rental. That’s far better than the average return of around 15% you’d get from the stock market.
That’s why today, I want to share five rules you can use to ensure you successfully invest in residential property.
Five rules to remember if you’re looking to cultivate a successful property investment
Rule number #1: Chase income
An income-producing investment is better quality and often lower risk than one that relies entirely on growth in value.
So while a coastal stand may grow faster in value than an urban townhouse, the townhouse will likely be a better investment.
That’s why, residential property is where a first-time investor should take his first step in building wealth.
Rule number #2: Accumulate, don’t rush
Invest over decades, not years.
If you’re below 50, you have a few decades in which to accumulate a reasonable portfolio at low risk. You’ll end up with a substantial contribution to a very decent living. And that’s what an investment is for.
Rule number #3: Specialise
There are about 12 million residential units in SA compared with nearly 400 companies on the JSE. So it’s a lot easier to find a property that’ll increase in value year-on-year than it is with shares. You just need to find the right one for your budget and your income needs.
Rule number #4: Your home isn’t an investment, it’s a pivot for future investments
If you sell your home to buy a similar one, you’ll have nothing over from the sale of the first house.
There are several ways to realise your wealth from your home.
- Move into a cheaper property, which is rare. Even older ‘empty-nesters’ who downsize usually buy a smaller house costing the same as their older, bigger house.
- Increase your bond, withdraw equity and use the cash to start a business or buy a second property that you can rent out.
- Improve your education and earning power or invest in a buy-to-rent property.
The last two options are the best ones because you can then use the income that results to reduce your home’s bond as quickly as possible and free-up this money for future investments.
Rule number #5: Become an expert
The residential property market has no central source of information and, as with other property markets, it’s impossible for the average person to know what’s happening in a particular place. More than any other property subclass, residential property markets are local and prices can be more affected by the microenvironment than offices, factories or shops.
So, unlike investing in unit trusts or insurance policies, seriously investing in residential property means becoming an expert of sorts. The high transaction cost of property – the sales commission, transfer duty and legal costs – and the big difference between capital gains tax and income tax combined with the need for some degree of expertise, means long-term investors usually get better returns on residential properties than speculators do.
So there you have it – five rules you need to remember before you invest in property.
For more must-have insights on how to ensure you pick up the best value property on the market and how to turn it into a life-long rental cash cow, check out the Become a Master Property Investor in 90 Days programme today.
Here’s to your financial freedom,
This article – “Five rules to successful property investing”, first published in Money Morning – has been authored by FSP Invest , an independent investment research publisher, with more than 50,000 subscribers in South Africa.