By Werner Prinsloo
Investing in Property remains the safest long-term investment anyone can make.
Here are some tips for anyone new to Property Investing.
Investing in Rental Properties
Most people new to Property Investing will consider the Buy to Let option. This is the safest Property Investment that can be made but offers only modest returns.
The basic idea is to purchase a property for under market value in an area where relatively high rentals are paid.
The property is then rented out, usually through an Estate agent. The agent will typically take a 10% commission on the monthly rental and should do a credit check on a prospective tenant. Most agencies will also collect the rent and do a pre and post rental inspection.
It is important to have a legal rental contract in place and to ask for at least 1 months deposit to cover any non-payment of rent, or to pay for any damage done to the property by the tenant.
Typically, the owner of the property will pay the monthly rates and levies, but the tenant will pay the municipal account. This must be clearly stated in the rental contract.
The average yield from rental Properties in South Africa is around 12 % per year. This is not including any unexpected costs, like doing renovations when a tenant vacates the property or paying special levies when maintenance is done by the body corporate.
In addition to the rental income, the property value should also increase year to year although, in the current economic climate, we have seen little to no growth in property values.
It is advisable for anyone considering the Buy to Let investment strategy to learn more about becoming a professional Landlord. Several online courses and books are available to teach the fundamentals of becoming a successful Landlord.
Risks of Investing in Rental Properties
Although the return to the Investor can be decent there are potential risks involved.
The tenant can damage the property during their tenancy, this can erase any profits made by the Investor. We have helped several Landlords to sell their Properties when this happens. In these cases, the cost of renovating was so high that the owners were more than willing to sell the Property to our Cash Investors for below market value.
The property can also be vacant for many months before a suitable tenant is found. As the rental market is quite healthy at present this period should only be for a couple of months, but this will reduce the profit of the Landlord.
We have also seen many cases where the development has not been properly maintained by the body corporate, leading to falling property values. In some cases, the body corporate might institute a temporary special levy to do maintenance at extra cost to the property owner.
Investing in rental Properties only makes sense if the property is purchased for well below market value, and a reliable long-term tenant can be found.
Investing in Bank Repossessed Properties
This option offers a higher return than the Buy to Let option but can also have higher risks involved.
When Property owners are unable to pay their monthly bond, the property can be repossessed by the bank and sold at a Sherriff auction or can be bought by the bank itself and resold to the public.
In most cases, it is not possible to view the property prior to the Sherriff auction. The buyer will also be responsible for any outstanding rates, levies or municipal accounts.
Sherriff auctions can be risky to a new Property Investor unless a thorough due diligence is done prior to the auction to eliminate as much risk as possible.
In our experience Properties can sell for 30 to 50 % below market value at Sherrif auctions.More info on Sheriff auctions can be found here: LINK
Bank Repossessed Properties will be advertised on the banks’ website, and typically are sold for around 10 % below market value. More info on Bank repossessed Properties can be found here:LINK
Investing in Properties from Distressed Sellers
This investment strategy offers the highest returns with the lowest risk and is the focus of our company.
One of the major risks involved with Sherriff auctions is that the property cannot be viewed before placing a bid, exposing the buyer to potentially huge refurbishment costs. It might also be necessary to evict the previous owner of the property if he/she refuses to vacate the property.
By buying the property directly from a willing Seller, this risk is eliminated, as the Investor can meet the Seller and inspected the property before any contracts are signed.
Property owners contact our company directly asking for assistance to sell their property for cash, they understand that they cannot be paid full market value, as our clients are Property Investors looking to make a profit.
Although each deal is different and can be complex, the basic process of a deal is as follows:
1. The property will be valued by our experienced Agents.
2. An offer will be made to the owner based on their needs. The offer will depend on the property value, cash deposit needs by the Seller and the payment terms.
3. The Investor will then receive a Report on the property with all relevant information needed to make an investment decision.
4. The terms of the deal are then negotiated with the Seller.
5. Contracts are prepared and signed when a Due Diligence process is completed.
Most of our clients make a return on investment of between 50 to 100% per year
For more info on our services: LINK.
Sources of funding for Property investment
Getting funding for Property Investments is the greatest obstacle to any new Investor. The following are some sources of funding that some of our clients have used successfully in the past:
Loans against Property
If you own a property that is unbonded, it can be used as collateral for a bank loan. We work with experienced bond originators that can help you get the best interest rates on a bond. This tends to be the lowest cost option to get a loan if cash is not available.
The term of the loan can be up to 20 years, making monthly bond payments relatively low. It takes two to three weeks to arrange a bond on a property.
If the property is not completely bond free but does have equity available, meaning that the property value is greater than the outstanding bond, the bank can agree to increase the current bond.
This entails structuring the purchase of the property in such a way that the Seller is in effect giving the purchaser a loan to buy the property from him/her.
This can be done in a few ways; the Seller might be willing to accept an initial cash deposit from the Investor, the Investor will agree to pay the outstanding balance after transfer to the Seller. When the transfer takes place, a bond is registered for the benefit of the Seller, to protect them in case the Investor was not to pay the outstanding balance as agreed.
The Investor can then resell the property to a 3-rd. party at market value. The Investor will then use the proceeds of the sale to pay the outstanding balance to the Seller and the bond will be canceled.
We have structured several deals in this way, some cash will be needed by the Investor, but this is usually a relatively low portion of the property value. In our experience, most distressed Sellers need anywhere from R 100 0000 to R 300 000 as a cash deposit.
Risks of Property Investment
The following are common risks in Property Investing:
Not doing a Due Diligence
The greatest risks in Property Investing can be reduced by doing a thorough Due Diligence, before signing any contracts or making any payments. Our company does this as a standard part of our service to Investors. For more info on our Due diligence process: LINK
Accurate Property Valuation
Doing an accurate valuation of the property is the first step in any deal, if the valuation is too high, it will take longer to resell the property and the return on investment to the Investor will be lower.
Property valuation is not an exact science but it is critical to do correctly.
Experience is a big part of doing an accurate valuation, but accurate sales data is also important. We use comparative market analyses, which in simple terms means comparing the value of the property with similar-sized properties in the immediate area.
This information is easily available from the title deeds office. This is especially useful when purchasing a sectional title unit. As units of the same floor size tend to sell for the same amount in a development.
We usually also get a second valuation from a local Estate Agent, that would have more knowledge of the property values in the area. Although we have found that these valuations tend to be higher than the actual market value, as the Estate Agents want to convince the Sellers to give them a mandate to sell the property.
The other risk we have found is that some sellers might not vacate the property when the transfer to the Investor takes place. We advise all our clients to only purchase a property that is unoccupied or where the tenant has signed a legal rental contract.
The legal cost of eviction can be high and will lengthen the time it will take to resell the property.
Unexpected refurbishment costs can reduce the profit when reselling the property. We make sure to get a least two quotes for any refurbishment that has to be done before any deal is concluded.
In most cases, only superficial work has to be done, to make the property more marketable. We do source properties that need extensive work, but most of our clients prefer to Invest in properties that need little to no work.
Investing in residential properties remains a safe and profitable undertaking, but experience and knowledge of the legal matters and risks involved are important. Feel free to contact Realty Investors at any time for a free consultation on any matter related to Property Investing.