The two fundamental aims when investing in property are still, as in any asset purchase, to achieve capital growth and to create an income stream.
This is according to Bill Rawson, Chairman of the Rawson Property Group, who says property investors, however, should clarify in their minds as to which of these is their primary aim and which is their secondary aim.
He says these days, even though they are looking for capital growth, investors may well find it possible to achieve good rentals from day one.
“Assuming that the investor puts down a 10% or 15% deposit and, in a sense, writes this off on his accounts, it is today sometimes quite easy to achieve a positive flow, thus one that covers the bond payments from the start.”
When this is not possible, there have been cases where this type of parity is reached within 12 to 24 months, he says.
Rawson says he has often been told that finding the data on which to work and identify the areas giving the best returns is difficult.
In practice, he says five or six telephone calls to the agents in the area in which the investor is interested and a careful perusal of the data banks, such as Lightstone, who use Deeds Officestatistics, will give a clear picture, and there can be little excuse for making a bad decision.
Property holding costs in South Africa today are generally in the 7% to 9% bracket, but there are many properties that will give better returns, he says.
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Rawson warns new investors that there are dangers lying in wait for the less experienced. He says sometimes a property will give a high rental in relation to its holding costs.
“The reason for this, however, is not that it is in a high demand area, but that the cost of the unit has fallen because demand is low, as the area is not performing.”
He says such areas should be avoided because once a downward trend begins, it tends to carry on for several years. Furthermore, in such areas, it may be difficult to find tenants, and if one does, they are more likely to be unreliable payers.
Sometimes, Rawson says an already tenanted property will be put on the market with a ‘guaranteed’ rent for a specified period.
Such guarantees are, however, fallible because they are based on the tenant’s lease. Should the tenant, as happens quite often, run into financial trouble, he or she may be forced to break the ‘watertight’ agreement, and if the property is in a low demand area, it may be difficult to find a new tenant.
At the moment, Rawson says the best returns, often giving a positive cash flow from the outset, are to be found in those suburbs conveniently sited in relation to the CBD.
These are now, throughout South Africa, often zoned for high density and they have therefore been able to attract developers who by-and-large create the affordable multi-unit stock which has proved a particularly good investment of late.
However, he says those investors who take matters seriously seldom confine themselves to these obvious high demand areas. They tend to find opportunities in areas not yet experiencing a boom and not yet recognised as likely to be up-and-coming. These may often be in outlying areas.
The future success of such areas will possibly be due to a steady but noticeable upsurge in tourism, or to the initiation of a new industrial area, as at Saldanha Bay in the Western Cape, or by the advent of a well-priced development like the Sitari project near Somerset West, which is already influencing all prices in its vicinity.
“Many outlying towns such as Riebeek Kasteel, which is also in the Western Cape, were hard hit by the recession because a high percentage of the property owners were investing in second homes.”
However, he says such areas are now often experiencing a comeback, and in three or four years’ time will be recognised as having been a good investment for those buying now.”