Property investment has long been heralded as a sound and smart choice for investors seeking to build wealth and secure financial stability and, with growing economic uncertainty making investors cautious, more and more people are adding real estate to their investment portfolios.
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“With its potential for long-term capital growth, rental income and, in some cases, tax advantages, property offers a tangible and reliable asset class that has historically outperformed other investment options,” says Yael Geffen, CEO of Lew Geffen, CEO of Lew Geffen Sotheby’s International Realty.
“According to the 2024 wealth report by Frank Knight, residential capital values grew by 3.1% across the world’s leading prime markets through 2023 and more than a fifth of global UHNWIs are planning to purchase residential property in 2024.
“And there’s a very good reason for this: not only does property investment offer the potential for passive income through rental yields, providing investors with a steady stream of cash flow, it can also act as a hedge against inflation, as property values tend to appreciate over time, preserving and growing investors' wealth.
“Property ownership therefore tends to offer better long-term financial security and, on another level, being a physical asset with intrinsic value it invokes a sense of security and stability.”
There are various property investment strategies for those who want to add bricks and mortar to their portfolios but Geffen cautions that it’s important to understand the various options in order choose one that best aligns with investors’ current affordability and long-term financial goals.
According to Geffen, investors the following options are well-suited to novice investors looking to enter the market:
Single Buy-to-Let Investments:
The most common investment choice, single buy-to-let investments involve purchasing a residential property with the intention of renting it out to tenants.
This strategy offers investors the opportunity to generate rental income while benefiting from potential capital appreciation over time.
When considering property as an investment, investors should calculate the projected rental yield which is the annual income you receive in rent, relative to the purchase price of the property.
Rental yield: Annual rental income ÷ purchase price x 100
It’s also essential to carefully consider factors such as property location, rental demand in the area, and maintenance costs when evaluating buy-to-let opportunities.
Buy-to-Sell Investments:
Buy-to-sell investments, also known as property flipping, is purchasing a rundown property with the aim of doing renovations or refurbishments and then selling on the property quickly for a higher price.
This strategy is a little more complex and requires a keen eye for market trends, renovation expertise, and a thorough understanding of the target market.
If you choose the right property in the right area, there is the potential to make money relatively quickly – and you could learn a lot and pick up new skills.
But investors should be prepared to navigate challenges such as renovation costs, budgets and deadlines which are easily overrun and capital gains taxes.
Student Property Investment:
According to another report by Knight Frank, South Africa's student housing sector has witnessed steady demand growth, with an increasing number of students seeking quality accommodation close to universities and colleges.
This demand is projected to continue its upward trajectory in the coming years, presenting opportunities for investors and developers to capitalise on this growing sector.
And, with the government's focus on expanding access to education and improving the quality of tertiary institutions, enrolment numbers are expected to rise, further fuelling demand for student accommodation.
However, with continuing public sector budget constraints, private investors will have an important role to play in meeting this demand so there is massive scope for investment.
As with almost any property, location is one of the most important considerations when investing in student accommodation and it should, ideally be within walking distance of the institution.
It also pays to check the safety of the area in which you are planning to buy, as well as the security provisions in the complex or building and complexes with facilities like a pool and braai area and possibly a games room, a gym or other recreational facilities will be especially popular with students.
HMOs (Houses of Multiple Occupation):
HMOs represent a unique investment opportunity in the real estate market. This is the practice of renting out individual rooms within a single property to multiple tenants which is gaining in popularity as the cost of living and rental and house-buying prices continue to rise.
This strategy allows investors to maximise rental income by catering to tenants seeking affordable and flexible accommodation options.
Additionally, HMOs can provide a diversified income stream and mitigate vacancy risks, as vacancies in one room can be offset by income from other occupied rooms.
However, investing in HMOs requires careful consideration of regulatory requirements, property management responsibilities, and tenant turnover. Proper due diligence, including thorough market research and financial analysis, is essential to success in the HMO investment sector.
Fractional Ownership:
Fractional property ownership involves multiple individuals sharing ownership of a property, typically a vacation home or investment property. Each owner holds a fraction of the property and, in the case of a holiday home, has the right to use it for a certain period each year if it’s not rented out.
While fractional ownership can make owning property more affordable and accessible, it comes with a caution: Owners must agree on usage schedules, maintenance responsibilities, dispute resolution and potential exit strategies for this type of investment to work well.
“Property investment offers a range of strategies for investors seeking to build wealth and achieve financial success, and it’s a savvy option for those looking to secure their financial futures,” concludes Geffen.
“Each strategy has unique characteristics which investors can leverage to achieve their investment goals, however, as with all investments, it does have potentially costly pitfalls and it's essential for investors to conduct thorough research, assess their risk tolerance, and seek professional advice to make informed investment decisions in a dynamic and evolving market.”
READ: Navigating property investment for wealth building: Benefits and pitfalls
Local Real Estate agents Lara Hamilton Potts and Keith Harrison suggests buyers work with an agent: (read full article here)
“In addition to only using an accountable and experienced Agent/Agency when purchasing a property always consider if you were to resell what are the pros and cons about the potential property. ie. be wary of steep driveways, lots of stairs, and other aspects that may hinder a potential sale further down the road.”
“If you are buying an apartment or sectional title property check the levies and special levies so there are no hidden surprises that will affect you and especially the pet policies," says Hamilton Potts.
Harrison says as this will be the largest purchase you are likely to make, ensure you work with an agent you trust and who listens to you and understands your requirements regarding price and size of property.
"Ensure that the agent will guide you through the purchasing process especially and discuss important aspects such as location, security, schools, access to amenities like hospitals and shopping malls and access to Highways and Airports amongst others," he suggests.
Understand the entire costs of purchasing a property:
"It is important that first time buyers understand the entire costs of purchasing a property particularly that there are bond costs and transfer duty costs which are over and above the actual purchase price," says Richard Anderson of Local Real Estate, Ballito.
“There are differences between purchasing land, an already built property and off plan purchases. The agent should establish the end goal for the buyer to assist with this decision.," he says.
Local Real Estate agent Jake Morgan, says: “Being pre-qualified as a buyer who can afford a certain priced property is a definite advantage. This is a free service so use a trusted originator, as it also saves time on the purchase".
“When buying a ready built home, request the house plans and make sure that they are up to date and approved with an occupational certificate as sometimes renovations have not been approved by the municipality which really complicates the process. This is a vital piece of information.
“If buying for investment purposes, such as a rental property ensure you are purchasing in a popular area and usually less is more, as there is demand for a 2 bed 2-bathroom apartment. Avoid higher priced purchases as this means the rental needs to be higher and it could be a struggle to rent out," says Morgan.
In the meantime Rory Anderson another Local Real Estate agent in Ballito says, many buyers are now leaning towards secure Estates and complexes wanting security and facilities but even within these Estates, location is critical for future growth and resale.
"The properties that see the best returns on investment are those that are not on fence lines, that enjoy lovely outlooks and are also not too far from the entrance gate(s). It is also important for purchasers to think ahead and choose properties that will appeal to a wider market such as a lovely single level property as these will also enjoy faster growth than their counterparts with stairs and no gardens".
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Arnold Maritz, Co-Principal for Lew Geffen Sotheby’s International Realty in Cape Town’s Southern Suburbs and False Bay, shared the main advantages of real estate investment.
Cash flow: Unlike many other investments, real estate has the ability to generate cash flow, either in the form of profit once you’ve paid off your mortgage or as rental income, whether from an income-producing flatlet on your primary residence or from separate properties. Cash flow from real estate is also far more stable and predictable than most other businesses.
Ability to appreciate: Generally, the value of properties appreciates with time which means that the longer you’ve owned property, the more it will be worth, making it the ideal nest egg.
Tax concessions: As a real estate operator, you’re able to deduct items such as interest and maintenance over time as business write-offs.
It gives you leverage: By consistently servicing the mortgage, you have the opportunity to tap the equity that you have built up and if you own multiple properties or buildings with several units under one roof, you have the option to cash out at any time.
Loan pay-down: When you buy a property with a mortgage in order to rent it out, your tenant is paying at least part of the monthly bond repayment, which means your property is essentially a savings account that grows automatically without you investing very much more – if anything at all.
Hedge against inflation: When inflation increases, so does your rental income and often your property value as well. In other words, when the cost of living goes up, so does your cash flow.
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