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Property Investment

The 20 Mile Rule

Disciplined property investors should not focus on business cycles, but on yield and cash flow.

Justin Clarke

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20-Mile-Rule

There is no doubt economists are a negative bunch at the moment. Sure these are difficult times and more than ever we need to take a good look at how we have prepared ourselves for retirement; the question of which asset class to trust still looms large. I challenge the perception held by many that it is not a good time for investing in property. The argument against property often makes a point that property prices are expected to remain flat for a while with very modest capital appreciation, which I accept.

I have made arguments over the last 12 months about how good times are now for finding great opportunities in property, and have laboured the view that this is the time that you should be in the market, but there is another very important point. A disciplined property investor will pay little attention to the business cycle and focus more on yield and cash flow than the ebb and flow of capital in and out of the market.

Lessons from the South Pole

I recently attended a talk by Jim Collins, the influential business management expert with top selling books to his credit like Good to Great and Built to Last. I was inspired to borrow this story from his new book to share with you.

In December 1911 two teams of explorers pitted themselves against each other on a journey to be the first to reach the South Pole. Both teams were determined to be the first to achieve this audacious goal, but they were vastly different in preparation and strategy.

Make the right strategic decision

First, the English explorer, Scott decided to take advantage of good weather to drive his team to the maximum to cover the most distance they could in a day (sometimes covering 45 miles on a good day) so they could rest and recover when bad weather would make the journey impossible. Scott had new untested equipment and ideas which he predicted would give him the edge and was confident that he would be the first to plant his flag at the pole.

Norwegian explorer Amundsen on the other hand, paced his team to cover only a set distance every day regardless of weather conditions, covering no more than 20 miles a day. He learned from living with the Eskimos what equipment, food and clothing worked in sub minus conditions, and planned carefully to cover only a short distance every day to prevent his team from suffering from fatigue. So they kept moving slowly with skis, dogs and sleds, able to make progress even in the worst of conditions.

On the evening of 12 December, after years of planning and more than 650 miles of journey through tortuous conditions, Amundsen found himself only 45 miles from the pole. The weather was clear and he had no idea of Scott’s whereabouts, but instead of pushing through to the pole he covered only 17 miles and set up camp once again, refusing to be tempted or influenced by conditions to change his strategy.

Amundsen eventually got to the pole first and returned back to base with his team intact. Scott, on the other hand perished with his entire team, found eventually only a few miles from the safety of camp.

Consistent growth wins

Jim Collins refers to this strategy as ’the 20 mile rule’ and his research shows that companies that grow consistently perform better in the long run than those that adjust their plan according to market conditions. But in real estate investment this rule is even more relevant.

Think back over the last seven years and remember how many unprepared adventurers dived into residential property investment and bought up houses in a frenzy while the conditions were bullish. At one stage in 2007, one in every four properties sold was bought for investment purposes and this fuelled an oversupply of housing, especially in the mid-priced market. Off plan offerings were snapped up by investors with no plan other than to flip on to a willing buyer who would hopefully be prepared to pay more for the property on completion.

The result was catastrophic for many who would have been significantly better off if they had a long-term plan and stuck to it religiously. I am sure you know investors like Scott who perished in the financial crisis that followed.

Most people buy property as a pension plan to replace their income when they retire, and this is where property investment is a winner.

But apply the 20 mile rule. Look at the end goal and decide how much free cash flow you will need to live off at that future date. Calculate the value of the debt-free property you will need to own to generate that income at that future date and work back to see what you will have to acquire to make that happen. Work on yield or cash flow. There is no wrong answer as long as you end up with a plan and you stick to it, regardless of what the markets are doing.

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Why property can be one of the most stable investments to make. Read more here

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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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