Investment Properties - Part II

Last week I spoke about the value attached to your primary residence and debated whether it should be seen as an investment. This week I'm focusing on residential property that isn't your primary residence; holiday homes, share syndication and investment properties.

Holiday Homes
Your primary residence is a necessary place to live whilst an investment property is held with the intention of making a profit. The holiday home is an exception to this as it also has as it's function providing accommodation for you and your family. This makes it a bit of a hybrid between property for use and investment property.

Even though holiday property can be seen as property for your residential benefit there are many variations of the theme mostly in an attempt to spread the risk and cost. Property syndicates, share blocks, time-share and even fractional ownership schemes all aim to limit cost and risk. There is an element of property investment in these types of property ownership but it differs from pure investment property.

Investment Property
Investment property is property bought (and/or financed) with the sole aim of providing a profit in either cash flow or capital appreciation. There are again a number of variations within this class of property ownership, most notably defined by the owner's intention.

Speculators
Speculators are people that buy with the expectation that there is going to be a rapid rise in price/value over a short period. A speculator will often buy off plan property as this affords the purchaser a number of benefits in a rising market, viz. the longer the time of development/building the more time the price has to escalate as well as buying off plan allows financing of the transfer costs. Requiring a relatively low deposit is one of the attractions of this form of property speculating.

A speculator might buy into a development that is being sold off plan putting the minimal deposit down, usually R5 000 or R10 000, with the intention of reselling the property before they ever take occupation. The expectation here is that the value of the units in the development will have escalated more than the costs to the speculator and return a profit based on the amount of money that they have invested as a deposit.

Investors
An investor's strategy normally takes a slightly longer view of the property market. Here investors purchase property with the intention of reselling (or re-financing) once there is positive equity in the property. A tenant is usually sought to help subsidise the cost of financing this property.

Again you will find different types of investors in this market. Some people buy into lower priced property, normally sectional title, and some higher priced property, e.g. property within an estate. Some investors are more focused on cash flow than others who might be focused on capital growth.

Some of these investors rely on being able to trend-spot, i.e. identify an up and coming area and invest here to maximise their return.

A sub-set of this investor is the buy-to-let investor that is primarily investing to realise a cash flow that is favourable and/or capital appreciation that allows them to realise some sort of profit.

Renovators or fix-uppers
Other investors will look to purchase property and change, develop or add value in some way before reselling to realize their profits. Sometimes the re-zoning and subdividing might be a method to add value to the property.

Developers
Developers normally purchase land and rezone, subdivide, build and resell or any combination of the above to realize a profit.

Conclusion
All in all there are many types of investors and each lends itself to a different style of investment. Next week I'll examine ways of determining the value of these investment properties as compared to primary properties.

Article by: Dave Welmans - (www.thepropertygame.co.za)