Property investment 101

The world seems to have entered a particularly tumultuous period. Both locally and abroad, confidence and certainty are at a low ebb, civil unrest is common and ‘disruptors’ are increasingly shaking up entire industries.

In challenging times, it can be difficult to decide where and how to invest. Given the inherent nature of capital - which as one economist recently stated is a ‘cowardly’ thing as it goes where it’s safe and can grow - deciding where to invest is that much harder. For many, the only option is to invest in ‘safe haven’ assets such as property.

Traditionally, property has long appealed to those seeking a place to ‘park’ their money because it tends to retain and gain in value, albeit over the long term. It can also be used as a useful mechanism for diversifying an investment portfolio. In South Africa, there are several ways in which to invest in property.

Primary property investment:

Many aspire to owning a property as it represents security, a legacy and a place to call your own. In order to own a property, most people have to apply for a home loan which, used responsibly, can also be an effective investment tool.

Increasing the payments on a home loan above the minimum requirement can reduce the term which translates into significant savings. Home loans which have had extra funds paid into them can also potentially be used to fund business ventures or home improvements (which ultimately should add to a property’s value) at a far lower interest rate than unsecured, short term loans.

Of course there are several other ways in which a primary property can be used to bolster and diversify an investment profile. Over time, your property should also appreciate in value which will stand you in good stead in the long run.

Buy-to-let investment:

Investing in buy-to-let properties whether they be residential, commercial, retail or otherwise is a tried and tested model which, if managed well, can prove particularly profitable. Of course there are certain fundamentals which need to be met in order for this type of investment to succeed, especially in an increasing interest rate environment which can eat into rental yields.

Basic fundamentals include location, property type and quality, running costs, demand and the potential for property price growth. Potential tenants must also be thoroughly vetted and the rent should cover the bulk of the costs relating to the property, including any applicable management fees.

Investing in residential buy-to-let property is fairly straightforward. Other types of property such as those which fall under the commercial, retail and industrial banner require a more nuanced approach and specialised management.

Over time, buy-to-let investment properties should not only cover all of the costs but produce a profit too. Once paid off, the profit can increase significantly and the property should also have increased in value, which theoretically should place an investor in a particularly strong financial position.

Offshore buy-to-let investment:

For those who can afford to, investing in buy-to-let property offshore can be very attractive. By investing offshore, investors can effectively buffer themselves against South Africa’s economic and socio-political headwinds.

Specifically, investors can earn a foreign and in all likelihood stronger currency, and possibly even gain citizenship through various incentive programmes which have been implemented in a number of countries with a view to attracting investment.

Of course the same principles which apply to local buy-to-let properties apply offshore too. Contracting the services of a reliable, efficient offshore property management service is also key if you are going to go this route.

Listed property funds:

Local and offshore listed property funds will appeal to those who don’t necessarily want exposure to the issues associated with bricks and mortar ownership but still want to benefit from the underlying strength of this asset class.

By definition, listed property funds are funds which invest in real estate. The properties are managed by listed property companies which are essentially buy-to-let specialists and the yields generated (less management costs etc.) are distributed between investors.

Locally, investors can invest in listed property through Real Estate Investment Trusts (REITS) or Property Exchange Traded Funds (ETF’s).

Don’t bite off more than you can chew:

There are other ways to invest in property. If in doubt about any of the investment options, speak to your investment advisor. Whatever the case, you should always invest well within your means and have reserves in place. Lastly, property investment should be done with a long term view and should form part of a balanced and diversified investment portfolio.