Friday, 30 September 2011

Invest In Property - Know The Rules

Booms do not last forever, and neither do recessions, says Rawson Properties Group MD, Tony Clarke.

In a series of 'Investment Advice' evenings in Stellenbosch, Clarke says that the question he is most asked is; 'when will there be a recovery'? He says a precise prediction is not available and granted, this is the worst and longest running SA property downturn since 1976 however, a recovery will happen.

Those buying now, said Clarke, will benefit from the fact that interest rates are likely to stay low for awhile, with a possibility of a 100 to 150 base point rise, but they need a longer term view. This, he said, means that they must be prepared to hold onto what they buy now until 2020. They must, he said, see themselves as investors rather than speculators, and they must avoid two of the most common errors in property buying: valuing the property inaccurately, and buying properties purely for their long term capital gain rather than for their rental potential.

Rule number one is to invest in properties where you can earn rental income all year.

"If you buy land, especially undeveloped land, your children may benefit one day, but you are unlikely to do so. Similarly, if you buy homes in 'out of the way' areas like holiday resorts, the return on your investment will almost certainly be unsatisfactory." Ideally, said Clarke, the property investor uses the bank's money to finance a large portion of the property purchase and the income from the tenant to repay the bond. "Even in today's conditions rents do rise, making property for many people the most worthwhile – and most easily comprehended – asset class."

Clarke advised investors going this route to appoint a really competent rental agent, to take out rental insurance and to shop around for the least expensive bond finance. They should also, he said, be aware of their own cash flow constraints and all the expenses that a property can give rise to.

Amateur investors have all too often been caught by high repair costs. Clarke also advised splitting the monthly bond repayments into fortnightly repayments. This, he said, will ensure one extra payment and a large reduction in interest payable over the term of the loan, without paying any more than the stipulated amount. This will reduce the term of the loan to approximately 12 rather than 20 years. On a bond of R220 000, for example, taken out at a 19% interest rate, will reduce the interest paid out from R635 735 to R327 307, a saving of R308 428. Clarke was given a warmly grateful response by the audience, several of whom said that this was the first talk that had explained the logic of property investment in a way that all could understand.

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