Middle class kids seem to miss something these days. I am no expert on kids, but I look around at the kids of my contemporaries and as a rule they are seriously unmotivated. They don’t have a fire burning to do anything extraordinary. They don’t aspire to be the best they can be, or to create, learn, or build stuff. They have had life too easy.
If you are a parent I am sure you would love to find the magic bullet that would get your kids fired off in the right direction. I was a kid a few years ago, and a lazy SOB at that. I turned out okay, having worked really hard over the last three decades trying to build a legacy. So what was the magic bullet that got me off my butt?
I think it was one of the few things I learnt as a teenager that got me thinking — that magical concept of compound interest. Don’t worry about the equation, (I know I didn’t) but the penny dropped for me when I realised that if I was able to accumulate surplus capital every month and invest it, within a relatively short period of time I would not have to work.
I discovered that the reinvestment of the accumulating interest, on top of interest, would eventually have such momentum that I would be able to draw a living wage out of the fund every month without adding capital and it would still grow.
And that is the basis of building wealth which got me hooked as a teenager. Then I realised that if you play with the formulae a bit the outcome gets much more exciting! If you increase your capital contribution by say 10% every year, or if you can increase the interest or return on the capital that you have already invested, it has an even more interesting result.
It sounds like I am about to advocate an insurance product, but far from it. If you think about it, the insurance company needs to take your money, give you the promised return (maybe not far off what we assumed above) and still make a profit for their shareholders. So what do they do? They invest in property.
Yes, it’s not all they do, obviously, but they buy shopping centres and commercial buildings that generate a rental return, and a capital growth bonus.
So what I’m saying is that when the penny dropped and I discovered the rule of compound interest I realised I was free to concentrate on building wealth, and not looking to build a career. There may be few corporate ‘jobs’ for young people but there are endless opportunities to build wealth.
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Enter real estate
So now we get to talk about simple real estate investment.
You might not be able to help your child buy a shopping centre unless you are playing monopoly, but remarkably, residential property investment is a great place to begin accumulating wealth. It also involves a broad range of skills that will be valuable in life. Buying a residential property involves the discipline of saving, negotiating to purchase, understanding agreements, negotiating a loan from a bank, then finding tenants, maintaining the property and managing cash flow so the rental income comes in timeously, and is enough to cover expenses.
You can still find good, clean, low maintenance investment properties: small flats and townhouses in well run secure complexes near places of work that yield 7% to 10% per annum in year one. Interest rates are manageable at the moment and the fact that the banks are turning down home loans means that more people are forced to rent.
Property antagonists will tell you that property is only appreciating at small multiples, but understand the real effect of having a bond. If your property is worth R500 000 and it only grows in value by 5% it will be worth R525 000. If you were able to get a first time buyer bond with a deposit of R50 000, and the rental yield covered your levy, maintenance, and bond on the R450 000 balance, your actual return on your capital employed would be 50% for the year. Then your rental will escalate, and you will discover that your type of property has appreciated by 27% in the year, and your return on the initial R50 000 gets way more exciting.
It’s actually pretty simple. You don’t have to start big to end big. You only have to have the discipline to sacrifice something today for your benefit tomorrow. Small increments every year will provide financial freedom. And maybe it’s the magic bullet that will get your cherub off the sofa and pointed in the right direction.
The Rise of Mobile House Hunting
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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.
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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.
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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.
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?
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.
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.
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.
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.
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.
Property Demand Exceeds Supply
Property gives returns in proportion to your knowledge.
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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