Real Estate Investing 101

Property investment in South Africa has always been regarded as a highly popular investment tool.  Whilst markets persistently fluctuate, property is a solid and long term investment and over time, patient investors are able to make returns ahead of many other investment classes. Many investors prefer to directly own real estate because they can add and unlock value in an investment that they can control and mould. Passive shareholding in property funds can also offer reliable and solid returns, but strong capital growth can be found through direct property ownership.

There are several kinds of direct investment vehicles in property that you should be aware of before you move forward in investing. These include amongst others, buying rental properties, syndication and speculation.

Buying rental properties is the oldest type of property investment. A person purchases a property and rents it out to tenants. The owner or the landlord charges enough rent to cover all expenses and takes responsibility in paying the monthly bond installments, rates, taxes and any additional maintenance costs. The owner may also charge more for a monthly profit. However, the common strategy is to be patient and charge just enough until the mortgage bond is fully paid so that the majority of the rent becomes the monthly profit. Many South African property investors aim to settle their bonds and live off monthly rental income. This has been a great strategy to earn passive income.

Another type of investment is property syndication, a structured system where various investors buy a property together and divide the income and capital growth. A company will purchase or build apartment blocks or other types of sectional title units, and allow investors to procure them through the company. The company who operates the syndication investment group manages the units and takes care of the maintenance, interviewing of possible tenants and the advertising of vacant units. Thereafter, the company gets a percentage of the monthly rental.

Many property syndication schemes in South Africa have been very successful but there are some horror stories of unsuspecting investors being ripped off by fraudulent and unscrupulous schemes. Small syndications that are managed by professional people who you trust and have a solid track record, are probably your best bet if you prefer a more passive direct property investment strategy but still want to own tangible bricks and mortar.

Speculators are a different breed from the buy and rent property owners. We are currently seeing a lot of supplementary traders entering the market and there are numerous ways in which you can participate in their trading and speculative dealings. These speculators purchase properties with the intent of owning them for a short time, usually not longer than three or four months, and then hope to sell the property with a profit. This practice is also known as flipping homes, and is based on purchasing properties that are considerably undervalued or in an extremely hot market.
As markets cool down, there are many opportunities for speculators to purchase undervalued property which has margin built into its purchase price.  The auction mechanism is a common channel through which speculators purchase a large number of distressed real estate.

In the boom years, scores of speculators flipped properties that were bought off-plan from developers, but this market has dried up completely.  Within the current economic climate, speculators are bargain hunting and finding good deals for immediate resale.

When it comes to property investment, there are still countless varieties of investing you should consider. Just like other investments, there is big potential when it comes to investing in real estate. However, this does not always mean a definite gain.

If you decide to invest in real estate, weigh your options thoroughly and determine the costs and benefits of your actions before you take the plunge. You have to find out what type of real estate investment is the right one for you. After you have done this, use a valuer to conduct your research thoroughly and most importantly, determine your budget.

Remember, real estate is a good investment regardless of the state of the economy, provided you are vigilant.

Are you new to investing or are you an old hat, seasoned veteran? Click on the comment link below and share your story with us!