Only once one has the security of large reserves is one positioned to make appropriate investment decisions based on long-term viability rather than desperation. The latter is the ‘fear vs greed’ investor behaviour that fund managers always identify as the major reason for mis-timed investment decisions.
As to what to invest in, Corbett’s philosophy is diametrically opposed to that of almost all fund managers who preach diversification (and with it modest risk-adjusted returns). He suggests you choose a single asset class and turn yourself into an expert on it.
What’s your asset class of choice?
I am property-biased. It is the single asset class offering a geared return for which banks will lend 90% to 100% of the value.
What attracted you to property?
Your biggest cost – the bond repayment – is relatively fixed, while income escalates.
While I would not consider myself a true investor – like many entrepreneurs I invest everything into my business – I have built my wealth from the property industry.
What do you consider to be the common sense rules of buying?
- Listen to what people say, but always do your own research and make up your own mind.
- Always purchase with long-term growth potential in mind, as every time you sell you pay commission to an agent, transfer costs and duty. Try to keep property once the bond is paid off, as this is when it becomes profitable.
- Notwithstanding your long-term view, always have an exit strategy, by buying property only where you believe there will be lots of purchasers in the future.
- Buying property is an inflation hedge. The property price will escalate with inflation over time and the bond will devalue in real terms due to that same inflation.
- When purchasing, buy off-plan where possible. However, even if you trust the developer you need to do your own research to be sure the developer will deliver what it promises. Off-plan may give you a big kick in value as development approaches. In most of my estates there is normally a ‘kick’ of 30% to 35%.
- Never over-capitalise. Buy a cheap stand in an expensive area.
- When you invest, do so gradiently to manage the risk.
- Keep your first property until it breaks even and you no longer need to service the bond – then buy the next and so on.
If you follow these elementary rules, you will be able to get up to ten properties relatively quickly.
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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.
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.
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.
Recommended: The Truth About Property
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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