So you want to be a property investor?
now with a residential portfolio: lessons from the pros
A few years ago, property was quite simply the sexiest dinner party conversation. Everyone, from your dominee to your domestic worker, wanted a piece of buy-to-let action as residential real estate prices chugged up rapidly.
But then, the market suddenly ground to halt, prices faltered and bank credit dried up. Interest rates had a lot to do with the problems for new property investors: this is because home loan repayments mushroomed by, roughly, a staggering 30% while rentals, usually fixed at a rate and with an increase applicable only once a year, stayed put.
Then, another problem hit property investors this year: recession. If small time landlords haven't been struggling to keep their jobs and in many instances help fund rental shortfalls, their tenants often have been finding it increasingly difficult to pay rent on time.
Those whose properties have become a financial noose can't easily get out of their difficulties because genuine buyers, as opposed to "window shoppers", are in short supply. In many cases, recent buyers are putting their properties back on to the market and accepting break-even or even lower prices than they paid, just to get rid of a debt nightmare.
Recent travails for property investors are taken as a sign, or confirmation, by many that property is in fact the unsexiest thing you can do with your money. Ever. Some might even call you foolish for contemplating real estate investments.
But, if you are a regular visitor to Moneyweb's property news site Realestateweb, you will have heard from the experienced residential investors who generously share their views and advice in the comments' section under articles that now is actually just as good a time as any, and perhaps even a particularly good time, to build or develop a portfolio of bricks-and-mortar assets. Provided you are sensible, of course, and have genuine investment rather than speculation as your objective.
Their reasons include that:
* Property is a good income generator provided you buy at the right price. This means paying a sum that, from the outset, puts your monthly mortgage repayment close to, and preferably at less, than the amount you will pay the bank each month. As andrewa said, under the article Property recovery: fact vs fiction: "I don't buy my investment properties. My tenants do it for me. I just maintain them and collect the profit margins". (You can get a good idea of what you can expect to receive in rental on a property type in a certain area by trawling through rental properties available on the market - click here to see properties for rent on Realestateweb's rental hub.)
* As interest rates fall, the money situation is becoming easier for landlords. Visitor Brennan says that "with all the interest rate reductions" there is no need to put up rent for good tenants. "I have a couple of units of for lease renewal in September and have told my good tenants I will not be raising the rent," he says.
* Over time, property prices do go up - which is good for long-term investors. Says Etienne: "Without speculating where property values or inflation will go from here, as a property investor, and one who also built and is building at the moment, replacement cost has only continued its climb. Slower yes, but even today materials are 15 - 20% up from September last year despite huge drops in steel and land prices. Add to this labour cost that is still growing at 12% etc." As the years go by, you will slowly repay the debt for the property and the mortgage will get to a point where it is far lower than the market rental you can earn.
* Bargains abound - but you must do your research so that you can get a good deal. As Tuscanite's Wingman notes about fellow property investors: "They know their market well and know a fair value' of any given asset. So if he thinks a house is really worth R900k in a fair market, but gets it at R500k because the seller is desperate, deceased or scampered to Oz, then you know what, he has probably made a good investment." And, as Tuscanite says: "Markets are imperfect and information flow means there is still competitive advantage of one party over another."
* Property like shares will outperform other asset classes in the long run. History has shown this. As with share investments, it is risky and difficult to time the market, so buy with a view to holding for the long haul. You will make money. Better still, you will generate a steady income stream. As Tuscanite says of his strategy: "I am not keen on trying to time the market and its associated transactions and fees, just buy, rent it out and sell when convenient (if a better opportunity comes along)."
And, of course, it is worth remembering too that when an asset is "unsexy" it is considered a smart time to buy because the investment herd is looking elsewhere. This is not the first time property is out of favour; the asset class constantly waxes and wanes in popularity.
The economy will change, hopefully for the better, unless we adopt Zimbabwe-style policies. Sales will pick up and banks, at some stage, will make it easier for individuals to buy property again. Expect, at some point, property to be the talking point at dinner parties again. There will, as with last time, be those who are patting themselves on the back for getting in early when property was unpopular and those kicking themselves for leaving investment decisions to later.
Article by: Jackie Cameron - www.realestateweb.co.za