The objective if this step is to show you how to select your investment especially with regards to capital growth, initial rental income and future rental growth.
Types of property
There are many factors that are to be included in your consideration, starting with investment property type, namely commercial (offices and Industrial), retail or residential. Since the financial barrier to entry and required expertise are much higher in commercial and retail investment, our focus will be on residential property.
Residential property investment offers many options such as plots, houses, semi-detached houses, duets, clusters, townhouses, flats and town apartments. All of these have their strengths and weaknesses which you need to weigh up. Also bear in mind when investing that you are engaging in a long term commitment to the property in question.
Our preferences in the Gauteng context are townhouses and flats primarily because of ease of management and tenant demand which fuels growth.
Capital growth and return on investment
The place to find good capital growth is in a well-located fashionable suburb. To drill down even further, ground floor garden units are always in demand by tenants and purchasers alike.
The balancing act
Entry level investors typically require a high initial rental income return and may sacrifice high capital growth in the process. One needs to take advice from a coach (an astute experienced investor with good local knowledge) and avoid the temptation to lock yourself into a problem property that grows badly or even deteriorates. A classic sign of a degrading suburb is higher than usual rental return. In Johannesburg a classic example is Windsor, Randburg.
Mature investors will tend to invest with an expectation of higher capital growth and lower initial return on investment. They do so by subsidising the rental income on their new investments with surplus rental income from other mature investment properties in their portfolio.
This provides investors with an attractive tax trade off. By utilising surplus cash from within their portfolio to subsidise the acquisition of an additional property, they trade taxable profit for capital growth in another property.
This allows them to accelerate the portfolio’s capital growth, and is the natural organic method of growing a portfolio.
Let us look at the vital factors to consider in identifying a great investment;
Price – Here the rule is simple. The best growth is found in the smallest units in the best areas. Suburb “average price” statistics are relatively easily available. A quick check at the suburb average could prove very valuable.
Once you have a feel for the suburb average, drill down into the complex under investigation to establish the average prices for that complex. As an investor it is your sacred duty to beat the averages!
Tenants – The exercise that is required here is to get into the mind of your prospective tenant. What type of tenant lives in the area generally and in the complex you are looking at specifically? Demographic information of average household incomes is readily available on the internet.
For example, if the area is high in young singles or couples starting out in life, perhaps with one graduate in the family and one decent small car, then public transport and walking distance to shops and malls become major plus factors. An area fitting this profile would be North Riding, Randburg.
If you expect single or dual income yuppies (young upwardly mobile) who are recent graduates, bankers, lawyers who drive fancy leased cars and have no children, then public transport becomes less of an issue. Location close to major commercial nodes which offer employment, “retail therapy” and entertainment become the plus factors to look for. Fourways is a classic example with its great retail malls, restaurants, movie houses, a major casino and proximity to the Sandton commercial node.
Finishes – The investor needs to keep in mind that he wants to create a good living environment for his tenants. A grubby badly finished property attracts grubby poor paying tenants! One must be careful not to overcapitalise in an attempt rectify this, but this is one area where the investor can really buy well and then juice up his rental income.
The carpet – tile debate: Tenants are notorious for burning carpets – you will remember this with a wry smile every time you walk into a townhouse and see the imprint of a clothes iron in the carpet. A mystery which plagued me for years! Tenants seem to love ironing while watching TV, and all it needs is one person to trip over the cord and voila – we have a branding!
Body Corporate – Sectional title complexes are run by a body corporate consisting of a board of trustees appointed by the unit owners in the complex. They are entrusted with the maintenance, management and general order of the complex. Not all body corporates are equal and the investor needs to do his homework.
A visual inspection of the complex can speak volumes, what are gardens and grounds like, are the buildings in need of paint or waterproofing, are children running wild, are the security guards smart and alert, are the tenants hanging their laundry in the areas provided or strung on balcony rails? These are signs of a badly managed complex and you will do well to steer clear.
Another essential thing to watch out for is how well the Body Corporate manages its money. Study the financials of the body corporate before you invest!
Location – Location was covered extensively in the previous section, but a summary of factors to lookout for are:
- Bus, taxi and rail transport
- Proximity to commercial centres of employment and retail facilities
- Schools and crèches
Every investor has different requirements, different affordability and different preferences. He or she has to hold all of these in tension while considering the balancing act of initial rental income, capital and rental growth.
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