Why invest in property?
In the first instalment of our five part series on how to become a property mogul on a regular salary we explore the first step of investing in property – why property?
The main attraction of investing in property compared to other types of growth assets such as listed shares is that you can get part of the purchase price financed with a loan from a bank secured over the property.
Then, if there is any increase in the value of the property over time, the actual return on the capital you invested can be multiplied – a concept known as leveraging.
For example, say you buy a property for R400 000 with a deposit of R40 000 and get a bond from the bank for R360 000. Let’s say the property value increases in the first year by 5% – this will mean the property is now worth R420 000.
If we assume that your rental income over the year was equal to the total expenses (bond repayments, maintenance costs, rates and levy), then your initial investment of R40 000 would have increased in value to R60 000; which is a 50% annual return. Thus, through leveraging, a modest increase in value of 5% for the property meant that you earned a very healthy 50% return on your money.
Of course, we are making some significant assumptions:
• The annual expenses were equal to the total rental receipts
• There were no initial costs (e.g. transfer fees)
• There were no selling costs (e.g. estate agent commission)
• We didn’t consider taxes, whether interest deductions or income tax on the profits made.
Unlike listed shares on the Johannesburg Stock Exchange (JSE), a property is not a freely tradeable asset so there are substantial costs involved in buying and selling, and changes of ownership take months rather than milliseconds. For this reason, property is best considered to be a long-term investment with increases in value accruing from both an increase in price plus an increase in rental income.
Inflation hedge – with X-factor!
Over the long term property prices generally increase in step with inflation, and often do a lot better. At the same time, the real value of the bond remaining is being reduced by inflation. This means that a well-cared-for property should at least retain its value over time.
But with the right research and bit of luck, your property investment could do even better than generate a solid, reliable return. Perhaps you will have the good fortune of being invested during a property boom cycle. Just make sure to get out before it’s too late!
David de Waal (CA(SA))
Steeple Estate Agents
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