Making your biggest investment your best investment

The most recent statistics from Absa indicate that the average price of a home in the middle segment of the housing market is now just over R1 million. Indeed, buying even an average family home in the middle segment of the property market is a significant investment for most families.

“Buying a home can be much more than simply securing a place to live in for the next few years, if buyers take a long term view and look beyond just their current lifestyle requirements when making their buying decision,” says Adrian Goslett, CEO of RE/MAX of Southern Africa. “How you select, buy, maintain and improve your home, how long you keep it and how you manage the bond through which the home is financed are factors that determine whether your biggest investment will also be your best investment.”

If homeowners pay off their home loans, they - and their descendants - can live on the property virtually for free in years to come. Considering that a bond averages around 20% of people’s monthly expenses, living in a home that has been paid off releases a significant amount of cash every month for investing in other ways.

In addition, as the value of the property grows, equity – the amount by which value of the property exceeds the outstanding debt - is created, and homeowners can access this equity through a second bond or by refinancing the property to consolidate debt, pay for the kids’ university fees or raise money to start a business.

“In these ways, a property becomes more than just a roof over your head, but the foundation for building financial independence,” notes Goslett.

Making a good property investment starts with selecting the right property. “A property that has the potential to become a good investment is one that is bought for a good price, and is located in an area with strong potential for long term growth. These two factors will ensure solid appreciation in the value of the property over the long term. However, it means that buyers have to do some research before buying a property, for example, finding out what the future development plans are for the area, looking at predictions for future capital growth of properties and carefully considering prices of other properties in the area to ensure they buy the property for a good price,” says Goslett.

“Of course, homeowners are not limited to simply waiting for the natural capital appreciation to take. Homebuyers should also consider the opportunities to increase the value of the property or to generate income from the property, for example, acquiring business rights on the property, converting the property into a guesthouse or a nursery school, extending the property by building on another room or adding a bathroom, building a granny flat that could be rented out, subdividing the property, or even allowing a billboard or a cellphone tower to be erected. Again, this would necessitate thorough homework, as the buyer would need to check the title deed and the current zoning of the property, and perhaps speak to a number of experts such as builders or town planners to pinpoint the possibilities.”

The second crucial factor in determining whether a property becomes a good investment is how long the homeowner keeps the property. “Few people buy a property with a long term view of 15 to 20 years. In fact, most people buy a new home every five years or so, or as soon as a new job or a salary increase allows them to do so. As a result, there is not enough time for the property to really grow in value and the capital gains made when selling within five years or less are relatively small,” explains Goslett.

Managing your bond intelligently is also pivotal. “The bulk of home loan repayments are interest repayments, and unless homeowners pay more than the minimum repayment, it takes years before the capital amount of the bond begins to reduce. In essence, if you sell a home within a few years, you have essentially just paid the interest to the bank and have made very little progress in actually reducing the bond amount. The result is that any profit after settling the bond when selling the home will be limited. By paying even just R300 a month extra into your bond each month will not only save a small fortune in the interest payable to the bank, but will shave years of the repayment term,” explains Goslett.

Choosing the right property with good prospects for future capital value appreciation, ongoing maintenance and smart property improvements, as well as managing your home loan intelligently, can ensure that your biggest investment also becomes your best investment,” concludes Goslett.

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