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Investing in Property and buying off-plan

Investing in Residential Real EstateBuying property has always been seen as one of the most stable and reliable investments one can make. Has this changed after the recession or does it still carry weight. “The answer to this is yes. Due to current lower markets, investing in property is one of the most profitable investments you can make”, says CEO of Engel & Völkers Southern Africa Craig Hutchison.

The proof of this can be seen through a number of international players such as International housing solutions that have invested in the residential South African market specifically in the rental market. Low interest rates combined with low home prices equal the prefect investment. These two factors open the door for first time investors, but like any investment you should first bear in mind a few factors when buying as an investment.

Firstly ensure you understand the specific area that are considering investing in. The easiest way to find out is by doing research on the area. Something you should consider is what infrastructure development is taking place in the area. Areas with good infrastructure will be more profitable as good amenities attract rentals. Look out for the offering of schools, security, retail shops, public transport and very importantly the traffic congestion in the area.

Another consideration is to partner with someone who has property investment experience. This is especially for first-time investors. An experienced partner will assist you in obtaining the best possible outcome for your investment.

Also the old saying in real estate, location, location, location, applies here. If you do buy a property with the intent of renting it out, location is the key. Homes in areas where rentals are high or highly populated areas are ideal. Also look for homes with multiple bedrooms and bathrooms situated in secure neighbourhoods. Consider potential selling points for the property you wish to invest in. You want your investment to be as profitable as possible and buying in an area where you can make a good return in a few years is the ultimate investment.

Ensure you have sufficient capital. Before investing speak to a financial planner about whether you have enough assets to handle the ups and downs which come when you invest. If you intend to rent out the property, make sure you have the capital to pay the mortgage if the property is vacant.

Second home markets in South Africa have  recently shown a slight increase. This is a good opportunity for you to invest in areas that are predominantly a second home area. Coastal areas have shown to be gainful as a second home investment. But also bear in mind that when you  reside inland and you invest in a coastal home you should ensure that you have someone who can attend to the regular maintenance of that home.

Whatever you do, understand that investing in property is entirely different to buying a primary residence. When buying your primary home you have emotions that go along with the purchase. Should you invest take those emotions into consideration. If you find an investment property to be of the standards you would choose to live in, its more than likely that it will be a good investment.

Buying property off-plan can be daunting, particularly if it’s something you’ve never done before. We’ve all heard stories of shoddy workmanship, people being left in the lurch by inexperienced developers who fail to project the overall figures correctly, or those unfortunate buyers who are faced with the liquidation of the developer before the project is completed.

Thoroughly research the reputation of the property developer. You need to be able to trust that they can deliver on their promises and that you won’t be left with a sub-standard home – or worse, an unfinished or non-existent property.

So what do you look out for when buying property off-plan in order to avoid pitfalls?

Brendan O’Brien, CEO of Urban Space, a Cape-based property developer specialising in the development of top-end security estates in prime locations which are predominately sold off-plan, has the following tips for would-be buyers:

  • Certain clichés are over-used for a reason – they are true. The old adage of “location, location, location” is one that should not be ignored when buying property off-plan. It is a much sounder investment to buy the cheapest property in the best location than the most expensive property in the worst location.
  • If you are building up a portfolio, buying property off-plan can put your cash flow under dangerous strain. In order to avoid this, borrow at a loan-to-value (LTV) ratio. (A LTV ratio is the fair market value of an asset in ratio to the value of the loan that will finance the purchase. This gives the lender an idea as to whether the potential losses due to non-payment can be recouped by selling the asset.)
  • While a studied, numbers-based approach in deciding whether or not to make an investment in a new development is always important, you should never underestimate the value of your gut feel. Trust it.

O’Brien advises that, while buying off-plan can be an intimidating experience, there are certain benefits to it.

“When you buy off-plan, you have the freedom to personalise your home according to your tastes. You can tweak the design and layout of the property, as well as the finishes,” he says.

In addition, the value of a home invariably increases between the time you sign contract documents and the time the construction on your home is completed.

When it comes to selling property off-plan, O’Brien is something of an expert. One of Urban Space’s most recent developments, Adare Place in Upper Claremont, is a luxury security estate comprising of seven homes. Within a month of the launch of this development, six of the seven houses were sold off-plan at prices ranging from R12m to R24m. Construction of Adare Place is well under way and scheduled to be completed in March 2014.

Buying off-plan may seem like a leap of faith, but if you do your homework, you may be rewarded with your dream home at a discount on the open market value.

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