The perfect investment property

The perfect investment property

Why are some properties easy to sell while others are infinitely harder? Some put it down to buyer’s instinct and experience of the market. But it can be about more tangible factors

For many, property is a compelling investment that generates both monthly rental income and capital growth. That doesn’t mean it will automatically be a good investment, however. Taking this into consideration, an estate agent can add value by identifying the best possible opportunities for clients.

Agents who can earn the trust of investors by finding and selling good quality investments can also build long-term relationships. How, then, can you spot properties that will be the best for buy-to-let purposes?

VALUE

The investment costs relative to returns are probably most critical. With property, take into account the potential for growth in value as well as the likely rental income. Help potential investors understand the yield they can expect and the long-term outlook for property prices in the area.

The real prizes are those properties selling at a slight discount, but which are still likely to attract tenants willing to pay competitive rentals.

It is also important that the property won’t be too difficult to sell if and when the buyer feels it’s time to exit. “Property is quite a concentrated investment,” says Rick Briers-Danks, certified financial planner and partner at Veritas Wealth. “The investor is taking a lot of money and making a call on a single asset, so it’s essential they do their homework on the area in which they are buying.”

SIZE AND LOCATION

The best property investments tend to be smaller flats and townhouses, where demand is higher and yields are better. “Generally investors are looking for one or two-bedroom apartments in better buildings,” says agent Bianca Gutteridge of Tyson Properties, who has been selling along the Atlantic Seaboard for more than a decade. “They also want secure parking and to be close to amenities such as bus routes, shops and restaurants.”

Another factor to consider is the proximity to tertiary institutions such as private colleges and universities, which ensures a demand in the area from students.

WIDE APPEAL

For the best chance of securing tenants, the property should appeal to more than one type of person. “An ideal investment property should be attractive to a wide range of tenants, from young working adults to students attending nearby institutions, to the elderly,” says Lesiba Mooka, founder and CEO of Cobalt Blue Properties. This emphasises the importance of location: the more amenities in the area, the broader the potential tenant base becomes.

LOW MAINTENANCE

Many investors opt for older properties in less than perfect condition because they think they are getting a good price. The costs of repair and maintenance quickly add up, however. “The owner should be able to do little or no maintenance to keep the property in a presentable state,” says Mooka.

“Newer properties are generally better as few things as possible should go wrong,” says Briers-Danks. “You want fixtures that can’t break or don’t need to be maintained, and you probably don’t want additions such as swimming pools.”

CALCULATING YIELD

Anyone buying property to let should understand yield – effectively the return on investment. There are two ways to calculate it.

1. The first is gross yield, the annual rental income as a percentage of the purchase price: gross rental yield = (annual rental income / property price) x 100. As an example, if a flat costs R500,000 and the monthly rental earned from it is R3,000, the calculation would be (36,000 / 500,000) x 100 = 7.2%. Depending on the location, a good gross yield in South Africa is anywhere between 5% and 9.5%.

2. The second calculation is perhaps more important: net yield. Additional factors are required, some of which will need to be assumed if done before the property is bought. The formula is net rental yield = [(annual rental income – annual expenses) / total property cost] x 100.

Annual expenses include bond repayments, repairs and maintenance, council rates and insurance. The total property cost includes the purchase price, transfer duties, legal fees and prepurchase inspections.

Using the above example again, if monthly expenses average out to R2,000 and additional property costs R20,000, then the net rental yield would be: [(36,000 – 24,000) / 520,000] x 100 = 2.3%

Article from propertyprofessional