For all time, property has been the cornerstone of wealth. Around 50% of the world’s wealth is held in property. The truly wealthy, from the Queen of England to Donald Trump, all own extensive property portfolios. The wealthiest institutions, including the banks and life insurance companies, also own vast property portfolios – from shopping centres to holiday resorts to vacant land. Here’s our top tactics for build your wealth with property in 2015.
Direct investment in property
Owning property, whether in your own name or in an investment vehicle, such as a trust or company, is the most efficient way to create wealth. There are various property investment strategies which can be implemented, each of which involves its own risks and benefits.
Property investment strategies, in practice, are rarely black-and-white. More often, investors employ hybrids of the different approaches. For example, an investor may acquire a run-down property to renovate and then rent out. Select the strategy or hybrid that best suits your risk appetite.
A buy-to-hold strategy involves investing in a property with a long-term view of 10 or 20 years, in order to benefit from the natural long-term capital appreciation of property, which over the past 20 years has averaged 10.5% a year for residential property in South Africa. An investor may also use this strategy to acquire property that is likely to appreciate in value as a result of developments in the area. As the value of the property increases over time, the equity (the market value of the property less the mortgage balance) can be accessed through selling the property or, preferably, refinancing or using the property as collateral for a loan. This applies equally to types of property, from a primary residence to vacant development land.
In boom times, when property values are rising rapidly, some investors make spectacular profits using this strategy. However, just as many investors burn their fingers in exactly the same way. The objective is to make short-term gains based on high property price inflation. Speculating with property involves buying a property to sell at a higher price in the short term, so for this strategy significant short-term capital appreciation is critical. This is, however, a very risky strategy, since the capital appreciation may not be realised or a buyer may not be found and the investor could be stuck with a long-term commitment that cannot be honoured.
A “fix-and-flip” property investment strategy involves buying a run-down property in a good area and making an additional investment to renovate the property, which can then be sold at a substantially higher price. It is less risky than simply speculating on short-term capital appreciation, because the capital appreciation is not based on market factors, which is beyond the investor’s control, but rather on adding value through a calculated investment in upgrading the property.
Buy-to-let property investment is the superior strategy for one simple reason: it delivers an ongoing, passive, inflation-linked income as well as ongoing capital growth. The model is supremely simple – it is really a matter of understanding a common sense strategy and implementing a proven system that can be encapsulated in just six steps.
SIX STEPS TO BUY-TO-LET PROPERTY INVESTMENT
- Find a well-chosen property in an area with good rental demand and good prospects for future capital appreciation, harnessing the expertise and experience of a property investment club and using custom-designed software to ensure the numbers add up to a solid investment choice.
- Obtain the right finance to buy the investment property, for example, by using the services of a bond originator that specialises in buy-to-let bonds.
- Appoint a reputable rental management company to find, place and manage the tenant, as well as the property, professionally and at a reasonable fee.
- Manage your risk by, for example, taking out rental insurance and building up a reserve fund to cover contingencies.
- Use the rental income from the property to cover most – if not all – of the monthly expenses, including instalments on the mortgage bond, rates and taxes, levies, maintenance, insurance and rental management fees.
- As your relatively small investment grows into a passive, inflation-linked income stream for life, while also producing capital growth, simply repeat steps 1 – 5 as your cash flow and risk appetite allows to acquire another buy-to-let property, creating yet another income stream and yet another source of capital growth.