6 top considerations when investing in property
In my previous interview piece with the Western Cape Regional Sales Manager for SA Home Loans, Gustav Zwiegelaar, I asked him for his expert opinion on when he feels the right time for buying a second property might be.
In the second instalment of our interview, I asked him to share his insights on some of the potential pitfalls of investing in property – and how to avoid these. His top six tips included being cautious when buying a tenanted property, or a ‘charming fixer-upper’, and staying out of property investment if you are simply looking for a quick ‘win’.
Don’t invest in a property that’s far from home.
This particular word of advice was for prospective investors wanting to buy and let out their property:
“As a landlord, there’s nothing more frustrating than having to rely on a tenant’s account of problems or issues on a property,” says Gustav. “It can be expensive to pay for plumbers, electricians, or other service providers, especially for something you may have been able to attend to in person, had you been able to be on site.” Gustav’s tip is that you buy a property close by instead – in your suburb or at least in the same town or metropole – so you don’t have to manage it remotely.
Be careful when buying tenanted property
Evicting ‘squatting’ tenants is a lengthy legal process you’ll want to avoid: “Avoid purchasing properties with tenants where the seller can’t demonstrate that they are actually paying rent. Ask for proof of rental income upfront. If the seller is unable to provide this information, you could be buying a property with squatters, which will cost you money. A good safeguard is to insist on vacant occupation prior to registration.”
Think before buying a ‘fixer-upper’
According to Gustav, if you’re intending to retain a property for rental income, it’s best not to purchase a property that needs a lot of repair and maintenance work.
“As far as possible, purchase a low maintenance property that won’t be a drain on your time and money,” advises Gustav.
“An ideal first investment would be an apartment in an established sectional title scheme where there is a good track record of maintenance.”
Ensure good finances in a sectional title unit
A sectional title unit is a separately owned unit within a complex or development. The body corporate of a sectional title scheme is legally responsible for the day-to-day running and financial management of that scheme.
Gustav’s word of caution here is as follows: “When purchasing a sectional title unit, the investor must first go over the corporate body’s financial statements. If you are not familiar with financial statements, you can ask your property finance consultant, or someone you trust, to go over these statements and point out the pertinent issues.
“The fact that a building exists with a corporate body is not a guarantee of good finances and management. It is possible for sectional title schemes to be financially in trouble and unable to keep up with maintenance. If this is the case, steer clear!”
Avoid buying for a ‘quick win’
A property investment is generally a long term commitment that should realise wealth over time and there are input costs, such as transfer duties and bond fees, that must be offset with this growth in value.
“If you are looking to get in and out of the property market quickly, then this may not be for you,” cautioned Gustav.
Be aware of the cost of borrowing
Gustav had the following to share about interest rates and their implications on the timing of a property purchase:
“Interest rates are cyclical in nature, meaning that rates will typically rise over a period of time, stabilize and then decrease over a period of time before stabilizing again and so on. It is good to know the factors that have a bearing on rate pricing but, most importantly, where we are in a rate cycle before committing.
“For example, if you do not know where in the rate cycle we find ourselves at the moment, where rates have been and where the consensus view believe they are going, it might not be the best idea to commit to a transaction.
“Granted, it’s a particularly interesting time in South Africa at the moment to make an educated guess, but you should have a level of understanding about the factors that have bearing on the interest rate you’ll be expected to pay on your home loan.”
Whichever decision you make, remember that making an investment shouldn’t be an emotional decision. Base your decision on fact and sound logic. Don’t be afraid to offload a property when you feel it has run its course in terms of growth and return at the end of a cycle. There will always be new opportunities elsewhere: you just need to search and find them.
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