Real Estate Investing 101: A Beginner's Guide to Building Wealth
Have you ever wondered how property moguls build their substantial portfolios? They all had to start somewhere. Here are just a few ways that you can begin building wealth through property investment.
Building wealth through property can be an effective strategy when done wisely. Buying to rent is one of the more popular ways of doing this. Here are just a few tips and some expert advice if you are thinking of growing your wealth through the acquisition of an asset such as a house or apartment.
Do your homework
Before buying an investment property, it is important to have an understanding of the property market and current trends. Find out more about the property you’re interested in and its location. Will this property be appealing to prospective tenants now and in the future?
Consider how much rent you will be able to charge – around 0.7% and 1.1% of the market-related sales value is the industry norm. Paul Stevens, CEO of Just Property, advises investors to “compare this figure to average rentals in the area to get an idea of whether the property will be a good investment”. You want to be competitive but also able to cover a significant portion of your mortgage repayment.
Investigate how much the property value may increase over time. Up-and-coming areas with good growth opportunities may actually offer better returns on your capital investment over the long term than established and popular suburbs.
Engage with a rental property expert in the area to get an idea of current rental trends and know how your affordability may be affected in the future. “Beneath the national figures on tenant numbers lie significant variations from region to region, town to town, even street to street,” warns Stevens. “As a landlord, you need to know your location, your tenants and, crucially, your likely returns.”
Be smart with finance
Have clear financial goals set out. Do you want cash flow, or are you hoping for property appreciation?
Don’t over-extend yourself by financing a property at your maximum affordability. Have a built-in buffer to absorb interest rate hikes and maintenance. Explore the different offers made by banks to ensure you’re getting the best deal. A bond originator such as BetterBond can do this work for you.
Find out whether any incentives are available, such as The First Home Finance programme. Buying off-plan means no transfer costs, and first-time buyers may also qualify for incentives in some instances.
When doing the math, ensure that the property will generate sufficient income while also appreciating in value over time. Factor in risks such as periods of vacancy, tenants not paying on time, potential major maintenance, and additional costs such as homeowners insurance or rental income insurance.
Be legal wise
Know the regulations and bylaws relating to rental properties. Ensure the property is correctly zoned and that there are no use restrictions, for example, an apartment or a home in a gated community may not be allowed to house a commune.
Stay informed about land reform policies, especially if buying on the urban fringe, and familiarise yourself with laws as they relate to the rights of tenants and property owners.
Ensure that your lease is compliant with current legislation (Rental Housing Act) and understand eviction processes under South African law in case you ever find yourself needing to go that route.
10 Things New Property Investors Need to Know
- Understand the market. Ignoring trends can lead to owning properties with poor capital appreciation or rental demand.
- Location is key. Areas with declining infrastructure or poor prospects can negatively impact rental yields and property values.
- Choose the right finance option. Overleveraging with high-interest loans can lead to negative cash flow and financial stress.
- Focus on cash flow. If you only focus on capital growth and neglect cash flow, you could be in for trouble if the property market slows down or rental income dips.
- Be savvy about property management. Poor property management can lead to high tenant turnover, legal issues, and costly maintenance bills due to neglect.
- Consider all costs. Underestimating the costs of owning property can erode your profit margins.
- Be selective. A poorly selected tenant can lead to rent arrears, property damage and legal hassles.
- Be in it for the long term. Expecting quick profits can lead to disappointment and poor decision-making.
- Diversify. Relying on a single property can increase your vulnerability if there is an unfavourable market shift.
- Understand the legal framework. Failing to comply with legal requirements can lead to fines, difficulties evicting tenants or disputes with neighbours or the municipality.
Expert rental agents at Just Property predict that the supply of tenants will continue to increase over the coming decade. Stevens notes that “changing demographics, more mobile working patterns, and relaxing attitudes to homeownership are driving more people to consider renting. Yet anybody tempted to become a landlord must understand the risks and responsibilities involved. Your best protection is a skilled property professional to help you when you buy and a committed managing agent once you have bought – they will be able to vet your tenants, make sure your leases are water-tight, and take a significant burden around maintenance off your shoulders.”
As he notes, building wealth through property is possible and rewarding, but requires careful planning, knowledge and ongoing risk management to ensure sustainable success.