Property investing 101

Investing in property — also known as buy-to-let — is a popular way to grow your wealth, but it’s also an investment strategy that some people find daunting. Today, we’re giving you the basics of what you need to know.

We’re looking at the actual investment strategy here; we’re not going into the nitty gritty of finding a suitable property and the legal wrangling that buying property entails. That said, for the sake of context, here are the five basic steps to investing in property:

1. Find a suitable property
2. Secure finance
3. Follow through on the legal process
4. Find a tenant
5. Manage the asset and tenant

Important foundations

The first step is crucial: If you want your property investment to be successful, you need to buy a property that will give you a positive monthly cash flow. In other words, the monthly rent you receive from your tenant must be more than the total monthly expenses related to the property.

These expenses might include the bond repayment, municipal rates, paying for services like water and refuse removal, maintenance… If you’ve saved up enough for a big deposit payment, it will improve your likelihood of positive cashflow, as the bond repayments will be smaller.

Also investigate the area in which you want to buy — make sure you understand the demographics, costs per square metre, typical rent income etc., and any property trends like sustained demand from students or young professionals, for example. This will help you make an informed decision about where and what to buy.

Think long term

Investing in property is not a get-rich-quick scheme. Most investors rely on the bank to fund the purchase of the property, and they rely on regular income from tenants over many years to help pay back the bank loan and its associated interest. The idea is that the house or apartment will be paid off one day, and the rental income will then be pure profit. It’s likely that the property will also have increased in value, so you’d realise a profit if you decided to sell.

Serious property investment pros buy more than one rental property to create a portfolio that they constantly leverage to access more credit from the bank. This is higher-grade stuff. If you’re interested, we recommend reading Making Money Through Buy-to-let in South Africa by François Janse van Rensburg — a very informative book.

Risk-free?

Not quite. As with all investments, buy-to-let is not a failsafe endeavour. However, the risks can be mitigated by choosing a property that generates positive cash flow, choosing a property that will most likely increase in value, finding a reliable, long-term tenant and having some cash reserves in case your property needs maintenance or you lose a tenant for a few months.

Your net income might also be affected by changes in the housing market or changes to the interest rate. Working towards a good credit score can help you get a favourable interest rate from the bank.

Should I or shouldn’t I?

Some people like investing in property because it’s ‘real’ — you end up with a tangible asset that holds its value well, can increase in value, and will eventually pay you a tidy monthly income. But don’t ignore the risks! If you’re uncertain, set up an appointment with a qualified financial advisor who will look at your financial situation holistically and lay out your options.

Super exciting… Good luck!

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Thoughts, observations and insights. About money, life and 22seven. Visit 22seven.com

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22seven

22seven

Thoughts, observations and insights. About money, life and 22seven. Visit 22seven.com

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