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Property Investment

Sound Investing Starts at Home

Owning your own home is the first step towards becoming a retirement superhero.

Justin Clarke

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PropertyStory

If you are reading Entrepreneur, chances are you are considering a multitude of options to protect, grow and nurture your wealth. We all know how hard it is to build assets, but the bigger challenge is protecting them from marauders. The most common destroyers of wealth are inept governments, taxes and the slow killer inflation, but even more dangerous are those overzealous men in suits selling dodgy funds and schemes that are impossible to understand, but offer such delectable returns that they are just too hard to stay away from.

I am a property addict, completely hooked, and will do my best to convince you that fixed property is a great place to create wealth. This month I will unpack the basics of home ownership, before we delve into the more complex areas of property as an investment in subsequent columns.

Stability First

Property investment is a broad topic covering a multitude of subjects, so let’s kick off with the most common, and that is home ownership. Chances are you already own your own home and if you do then good on you. Home ownership is the pillar of a strong vibrant economy and a great vehicle for wealth preservation. It provides shelter and stability for your family, and it’s an asset that can provide security for other investments, an emergency or for education.

Ultimately, owning your own home should be one investment that is part of your life plan. If anyone tells you otherwise, consider the graph below.

The graph shows that house prices on average increased in value at a faster rate than gold (apart from the period 2005 to 2009), the JSE all-share index, fixed deposit, or CPI inflation, measured over 19 years, 14 years, nine years and four years.

Owning a home is certainly not going to make you famously rich. In fact, current statics show that the average home in 2011 is barely keeping up with inflation. House price growth minus inflation is expected to be around 1,5% for 2011, not a great yield by any standards, but with an improved outlook. And remember that this is a broad average.

Protect Your Wealth

So, what this shows is that houses are not going to appreciate in the next year or so. If you are not a homeowner, there is time to search and find the right property to buy. And hidden in the broad averages there will be great deals — homes that sell for a fraction of their replacement value. If you have done alterations recently you will know what I am saying.

The replacement cost of a home is roughly 34% more than the value of that home, the result of sellers selling at the best price that a buyer in a weak market is prepared to pay. The result of this is that developers stop building new stock, decreasing the supply. When demand picks up as it inevitably will, prices will rise until it is more viable to build new. Remember the bubble of 2007 and you will see that for a period it was cheaper to build than buy an existing home — it also created an oversupply of newly built stock.

What you also need to take into consideration is the inflation predictions and the effect that will have on price. There is no doubt that this will compound the problem of widening the gap between cost to build and cost of existing property, further pulling the price of your home up. As we know, inflation erodes our savings, but at the same time the economy adjusts to counter the loss of spending power. Increased salaries and wages improve the other fundamental affecting our house prices, which is affordability. Higher salaries mean we can afford higher priced homes and so can the other buyers searching for the same house type, pushing the house price further. If you have a home loan the interest rate may go up as government takes actions to curb inflation but the capital value stays the same, so devaluing by inflation. In effect your debt shrinks.

If you have any doubt that owning your own home is a great way to protect your wealth, look around you and see how many elderly folk facing retirement find that their home is their biggest asset. Your home is the ultimate insurance policy.

Justin Clarke is the executive chairman of Private Property Holdings and co-founder of Private Property, taking the company from a raw concept internet start-up to being the major player in the internet space today.

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Property Investment

The Rise of Mobile House Hunting

Over the past decade the property business has become increasingly digital and today property hunters are turning to technology to help them buy a home.

Colette Cassidy

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Property-investment

In the world of entrepreneurship and small business learning more about additional ways to supplement your income is a savvy choice.

Property can offer investors two potential new sources of income, either through letting the property out to tenants an ensuring a steady income, or alternatively, buying property and selling for a profit.

Learn more about the nature of property investments and discover how the digital age has changed the way in which property is bought.

We-recommend-tickRecommended: What You Need To Know To Become the Next Property Entrepreneur

Discover how the internet has changed buying property in a modern age, from the rise of online property shopping to the evolving role of digital media in the property market.

Today 9 in 10 of home buyers searched online during their home buying process, and property buying searches on Google.com have grown 253% over the past 4 years.

Buying for investment can be a minefield, and indirect property investment is an ideal option for many.

With a property fund, a professional manager collects money from many investors, then invests the money directly in property or in property shares, which can be the ideal scenario for an entrepreneur.

Over the past decade the property business has become increasingly digital and today property hunters are turning to technology to help them buy a home.

This infographic from All Finance Tax looks at the nature of investing in property, and how the internet has changed the way in which we look for property.

All Finance Tax - Investing in Property - Infographic

 

We-recommend-tickRecommended: The Truth About Property

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Property Investment

How Lawrence Kreeve Turns Everything into Gold

Lawrence Kreeve has made his mark on the property industry by turning good investments into multimillion rand ventures. He shares his secrets.

Monique Verduyn

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Lawrence Kreeve

Being in real estate since he was a teenager has taught Lawrence Kreeve how to financially package, market and sell residential real estate.

He transforms good products into great ones by being a hard worker who does his homework. His most recent coup is The Houghton, that well-known residential landmark overlooking the Houghton Golf Club. Started in 2010, it is being developed in phases.

Related: What Are Tax-Free Investments?

Kreeve was asked to research the sales potential of the ambitious project, which had been stalled by the massive global financial downturn in 2007. It urgently needed a fresh perspective in marketing its exclusive lifestyle and location as the recession eased.

With Kreeve on board, The Houghton is now in phase four and on target, with 250 units sold, amounting to more than R1,5 billion. Kreeve, a CA by profession, certainly knows a thing or two about the numbers. We asked him to share some of the secrets of his Midas touch.

Describe some of the early lessons you learnt about property?

Lesson 1

While I was a student, I bought a house in Boksburg with no money. I put down R1 000 as a deposit and rented it out to a tenant.

That was when I discovered that as a new landlord, you should never live more than 20 minutes away from your rental property. Within a few months, my tenant stopped paying the rent and by the time I arrived at the house he had taken the doors, the sinks and all the fittings that could be carried off.

I had to borrow money from a friend to settle with the bank, and it took a few years to pay him back.

Related: 10 Ways Buying a Lamborghini Is an Investment in Your Business

Lesson 2

I left South Africa in 1976 and landed up in Canada, where I worked for Deloitte Consulting. I got the opportunity to buy into an old hotel about 100km outside of Toronto. We turned it around quickly, and that experience taught me the value of finding properties that others might not notice, and making them attractive enough to bring a variety of different people in.

There’s a lot to be said for offering three or four attractions that draw different audiences; it’s about turning a place into a destination venue.

Lesson 3

Real estate is a long-term investment that holds its value far more than any currency. With the money I made from the hotel, I bought an apartment block for US $132 000.

It was rented primarily to older people who liked being able to walk to the shops, which were close by.

The block was yielding about 11% per annum at the time, and I was delighted to have found what I thought was the start of a proper property portfolio. Then my partner in the hotel business told me he would like to come in as a shareholder and manage the apartments for me.

What I did not understand at the time was that one bad apple really can destroy the whole cart. He moved his girlfriend into one of the apartments and the party would start at her place every night at 1.00am.

All the older tenants started to move out. My solid investment had been contaminated by a single bad tenant. I had to pay a lawyer thousands of dollars to take the thing off my hands and sell it to somebody else.

Lesson 4

Through the father of another investment partner, I was advised to look at another apartment block in Spadina Avenue, one of the most prominent streets in Toronto. But like some Joburg streets, it has a different character in different neighbourhoods. The side heading west was great, with lots of student tenants.

On the other side, where I bought the building, there were some rather undesirable people. I told them they had two months to move out and that I would be gutting the interior. Half of them refused.

I returned with a bouncer and we removed all the doors. Given that it was January and freezing, they soon departed. I had paid $92 000 for the building, but when I got a call from a developer who offered $125 000, I knew he had more experience than me, and I got out quickly. He sold that block a year later for $250 000.

Related: 7 Tips for an Investment Pitch That Excites and Inspires

So you had to go back to basics?

Yes. These early lessons actually taught me the basics: Don’t just do. I began to apply the principles I learnt in accounting from my mentor Bernard Herbert, who helped me through my studies and my board exam:

“Ascertain, assess, test, decide, do,” and keep repeating the cycle for as long as you need to. Do not just go with your gut.

Why do you believe local knowledge is so important for investors?

Local knowledge is essential in real estate. ‘knowing Joburg’ is not local knowledge, neither is ‘knowing Houghton.’

Local knowledge is knowing what happens on the street corners close to the property you are interested in. It’s developed over time and it’s based on experience.

What is the history? What are the demographics? What does the future hold for this area? Ascertain all the information you can, including the demand now, and the potential future demand.

Before you define what product you will offer in this location, ask your potential clients, “If I was able to offer you this, in this location, would you be interested?” They will tell you. That is what happened with The Houghton.

The development stalled initially and I was called in to help. The developers had predetermined what their market wanted, without doing the research.

It’s critical to find out everything you need to know about an area. What are the vacancy rates? What are the levels of rentals being achieved? Who are the tenants? What other competition is there? An area with 2% vacancy rates is obviously a great area to own an apartment block. Find out what other developments are planned. Is there a train or bus station? What universities, schools and hospitals are in the vicinity?

What are the negatives? Are bad elements encroaching on the area? Are there plans to commercialise it? You do not have to do all the work yourself – contact town planners and get the information from them.

Infrastructure is also important. Sandton today remains the best square mile in Africa because the infrastructure is largely supportive of the developments. In Fourways, on the other hand, infrastructure is way behind the rate of development, making it a difficult place to commute to and from every day.

Most importantly, remember that you are not buying today to sell tomorrow. Doing the research is your business.

How narrowly do you have to identify a target market?

A young property developer approached me with what he called a tax shelter real estate property development. He said his target market was doctors – medical professionals who have money to invest. He had done a good job in the past and he had a decent client base.

On looking at his marketing material, I advised him that he would sell more if people could better understand the product. I spelled out the offering and the sales came pouring in.

It was an experience that highlighted how important it is to select sites that are attractive to particular markets.

What has kept you focused over several decades in this business?

If you have a goal that you’ve determined is worthwhile, you have to want to pursue it for long enough to achieve it. To ensure success, it pays to keep reviewing your road map and your goals.

Step back and look at things in perspective to re-evaluate. Work out the critical path and keep reviewing where you’re heading and what you’re doing. Keep monitoring and keep measuring, as that will allow you to stay focused on the end game.

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Property Investment

Property Demand Exceeds Supply

Property gives returns in proportion to your knowledge.

Eamonn Ryan

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Property-Investment-Advice_Property-Investment_Personal-Wealth

According to SA Commercial Property News, the average growth in residential property over the past decade has been in the region of 23% a year, surpassing equity returns of about 17%.

However, is residential property fairly priced? In 2012 property economist Erwin Roode didn’t think so, stating that property prices were overvalued by at least 25%, based on long-term prices from 1967 to 2011.

FNB home loans strategist John Loos disagreed, saying that it would be more accurate to valuate properties only from 1995 onwards due to the political shifts that preceded it.

Jan le Roux, CEO of Leapfrog Property Group, points to May 2013 Absa House Price Indices, which revealed that nominal house prices grew by an annualised 11,1% in April. Real price growth, after adjusting for the effect of consumer price inflation was 5,2% in March.

As to whether equities or residential property offer the best value at the moment, Le Roux says that now is not the time to be buying over-priced stocks. And home prices? “There are fewer homes than there are people wanting them – so prices will inevitably continue to increase,” he says.

Related: The Rules of Property

Cut the emotion

Jacques Fouche, CEO of IGrow Wealth Investments, says residential property may not necessarily be the best investment, but it certainly can be for someone who knows what he’s doing.

“There are a number of rules. The first is to gear and use other people’s money. The second is to be completely unemotional about the properties you buy.”

“The single biggest mistake people make when buying an investment property is to buy a home they would like to live in, such as a R10 million holiday home in Camps Bay. We recommend you rather buy an entry-level property in an up-and-coming area such as Kraaifontein, with good infrastructure and commercial activity,” says Fouche.

The two preconditions for buying a property are sustainable rental income and sustainable capital appreciation.

Fouche explains that the best returns are to be made from homes in the R0,4 million to R0,6 million bracket, usually sectional title, let to young families that do not yet have enough capital for a deposit, and therefore are forced to rent, yet earn R10 000 to R20 000 per month.

“The capital growth will also be higher than on a luxury property.”

Related: Start Early, Retire Rich

Make Informed decisions

The problem with residential property is having sufficient information, and for this reason Fouche recommends joining a club such as IGrow. On your own, it’s hit-and-miss. “By the time you read about an area in the newspapers, it’s too late to invest,” he says.

He claims that through these basic rules – and a good credit history – anyone can build up a property portfolio of hundreds of houses.

Fouche emphasises the attraction of security complexes, for which there is far higher demand than non-security complexes.

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