What is a good property market and who gets to decide? One of the biggest questions at dinner parties, in the press and in this article is the current state of the property market. Apparently it’s all gone bad since the ‘crash’ in 2008. But as the old English proverb states, one man’s meat is another man’s poison.
Robert Kiyosaki, best selling author of numerous books on the subject of real estate investment, wrote about the influence that his ‘rich dad’ (in fact his friend’s father) had over him in his formative years, and how he had learned many lessons from him about creating wealth from property.
I thought I would share a story about an uncle of mine, let’s call him Keith, who was very good at accumulating wealth even though he was from humble beginnings and had limited formal education. Through the years that I watched Keith build a modest empire he never used a computer or read a newspaper, but relied on paper, a jar of pencils and a calculator to make decisions. If those tools could not guide him on a deal he would stay away, and it worked for him. His shortcomings were, in retrospect, one of the reasons why he was successful. He was not clouded with a noise of unnecessary information.
The buy-to-let phenomenon
So let’s look at buy-to-let today through Keith’s eyes. Developers produced more stock than the market could absorb, so there is still surplus stock of new built (maintenance-free) houses, townhouses and flats available, many directly from the developer at 2007 prices, including VAT (so no transfer duty). The previous interest rate cycle has put the average over-indebted South African household under significant financial distress, sprinkling the market with desperate sellers, pressured by the banks to sell at a loss or face repossession. At the same time interest rates are at their lowest since 1973, so cost of capital is cheaper than it has been for nearly 40 years. There are more tenants in the market as a result of tighter lending criteria by the banks and first time buyers are less able to move to becoming home owners. Finally, rentals are firming. To an investor, this looks like the perfect opportunity. I know what Keith would do. But in this world of information and data, investors seem to be staying out of this ‘bad’ market. According to the fourth quarter FNB Estate Agent Buy-to-Let survey, buy-to-let buying was only 7% of overall transactions in the period, down from over 25% at the peak of the ‘good’ market in 2004.
Of every four buyers in early 2004, at least one was buying for investment purposes. Consider the amount of supply of units that came onto the market for rental. Fundamentals matter in real estate investment more than anything. Real estate is simple, there are fewer variables and cycles happen more gently. You should not consider investing in residential property as a short-term investment, buy well, don’t over-gear, hold and don’t worry about the cycles.
Ask me if it’s a good time for residential real estate investment and I will stick my neck out and say yes — it always is. Don’t listen to the noise.
- Starting is easy if you have a stable job, a history of bank statements, and savings for costs and a deposit.
- Buy property with a good yield. There are good properties for sale at yields of as much as 10% in year one, so it is possible to buy cash flow positive. Be prepared to sacrifice capital growth for higher yields or find a happy medium.
- Gearing (bank finance) is vital and increases your net return, but do not over-extend, or you will be forced to sell when you should be buying.
- Buy low maintenance property — new is good, but strong body corporates may surprise you with low levies. Check the state of the body corporate finances if sectional title.
- Fit pay-as-you-go electricity meters to avoid tenant arrears.
- Buy where the tenants are, near places of work.
- Have a plan to deal with errant tenants and maintenance, or find a good managing agent to do it for you.
- Investing in buy-to-let property is a long-term game, don’t expect immediate returns.
- Buy property and never sell it. Refinance it if necessary.