Rental Property - do your (Home) work

Johannesburg – If there was ever a right time to buy a house it is now, said Warren Buffett, chairperson and chief executive of Berkshire Hathaway in a recent interview on CNBC.

Buffett, who is worth around $44bn, is the second-richest man in the world, according to US magazine Forbes.

Buffett considers houses the top investment currently, but then not any old house – buy bargain homes that can be financed with 30-year loans, with the idea of letting them out.

He considers it a wonderful plan to buy a few hundred thousand such houses and obtain home loans at very low interest rates.

In the US interest rates can be fixed for long periods, which makes the low cost of finance advantageous.

This is what Buffett would have done if he knew where he would find himself over the next 10 years.

He says five years ago people could not buy houses fast enough because they thought prices would continue to rise, but now they are not buying because they think prices will continue to fall.

“This creates an attractive asset class for residential investors.”

As far as his own home is concerned, Buffett does not flaunt his wealth. According to Forbes he still lives in the same relatively modest home for a billionaire in Omaha, Nebraska, that he bought in 1958 for $31 500.

Rode & Associates property valuer and economist Erwin Rode agrees with Buffett that this is the right time to buy in the US, but he says this in no way applies to SA’s housing market.

“In the US there has been a significant correction in house prices and prices have in real terms dropped close to their long-term trend line, which makes it a good time to buy.”

South Africa’s housing market has not experienced such a correction, according to Rode.

First National Bank property analyst John Loos says that the South African housing market still has to reach the bottom of the cycle. “Although it is currently a better time to buy than four years ago, it's still not the best time.”

Magnus Heystek of Brenthurst Investments says the best time to buy any asset is when the market is down, not when it is booming and everyone is talking about it and boasting good results. “It’s like waiting for shares to reach record lows and then to buy them.”

Heystek says the best profits are generally made in the initial stages of a revival, not the final.

SA’s residential investors have still not regained the healthy appetite for buy-to-let properties seen before the recession.

The percentage of investors in rental properties was an uninspiring 8% of all buyers in the fourth quarter of 2011, as shown by FNB’s property barometer. This is a mere drop in the ocean compared with the 2004 high of 25%.

Rode reckons this shows that buy-to-let investors are probably showing good sense. “Interest rates remain a huge unknown, which is one of the reasons they have not re-entered the market.”

Household Debt-to-Income improves - South Africa

Debt-to-disposable income has decreased in the second quarter, causing debt service risk to decline further from 6.18 to 6.10 according to the FNB Household Debt-Service Risk Index.

John Loos, FNB Home Loans Strategist, said that this decline implied a decline in the household sector's vulnerability to any unwanted events such as interest rate hiking or economic growth slowdown, which could impair its ability to service its debt at some future stage.

He said that the index takes into account the level of household indebtedness, as expressed by the household debt-to-disposable income ratio, the direction in which this ratio is moving (currently downward), and the level of interest rates (prime rate) relative to long term consumer price inflation (5-year average inflation).

The lower the debt-to-disposable income ratio goes, the lower the risk, and downward momentum in the debt ratio thus also exerts downward pressure on the overall Debt-Service Risk Index.

The decline in the ratio has been brought about by slow single-digit growth in the value of household sector credit in recent years, enabling nominal disposable income growth to outgrow the pace of credit growth according to Loos.

He said the pace of decline had been slow going, however, as disposable income growth since the recession in 2008 had also remained slow compared to the pre-recession boom years. Nevertheless, the second quarter did show some further rise in year-on-year disposable income growth from 8.9% in the first quarter to 9.9%. This, along with a slowing household credit growth from 6.8% in the first quarter to 6.4% in the second quarter, resulted in further reduction in the debt-to-disposable income ratio.

Loos said that reducing the debt-to-disposable income ratio further looked set to continue to be challenging, because the renewed economic slowdown of late looked set to see slowing disposable income growth in coming quarters.

"However, we believe that the downward trend will continue at a gradual pace due to simultaneous slowing in household credit growth, reaching a level below 70% during 2013," Loos said.

He said that on the other hand, the lower interest rates get, relative to long term average inflation, the higher the risk for the household sector becomes, because this implies a diminishing probability of further interest rate cuts and an increasing probability that future interest rate moves could be up.

Therefore, Loos continued, a slight rise in the five-year average inflation rate in the second quarter, brought about by a recent rise in consumer price inflation, had exerted slight upward pressure on the overall index. However, against this, a further decline in the household sector debt-to-disposable income ratio, from the previous quarter's 76.8%, to 75.9% in the second quarter, had offset increased interest rate risk and caused the Household Sector Debt-Service Risk Index to decline further in the second quarter.

This level of debt-service risk, however, remains high by historic standards, with the long term average since 1970 being 5.1 according to Loos. Further significant reduction in the debt-to-disposable income ratio would thus appear essential. The lowest level of 2.74 was achieved in the final quarter of 1998, and it was this low level that preceded the start of one of the country's great consumer and home buying booms. - I-Net Bridge

How to manage Property Cycles anywhere in the World

The dizzying heights of the most recent property boom, when house price growth peaked at an average annual rate of 32% in 2004, as well as the protracted recovery period in which the property industry has been languishing since late 2009, are prime examples of fluctuations that obscure the otherwise clear cyclical movements in the property industry.

One of the fundamental basics of economics is that markets move in cycles. Markets experience boom times, followed by a period of market correction and a downturn, before the next boom arrives. This is a natural phenomenon evident in all markets, and whether it is called "boom and bust", "bulls or bears" or simply "peaks and troughs", investors can be absolutely certain that neither a growth period nor a downturn in any market will last forever.

What was uncertain, however, was the highs or lows that may be reached during an upturn or a downturn, and the duration of either.

"In the property industry in SA, the average cycle normally spans around seven years," says Dr Koos du Toit, CEO of the P3 Investment Group.

"But given the heady heights reached in 2004, when many analysts and experts warned of a 'property bubble', as well as the subsequent economic turmoil as the world experienced the worst recession in living memory, it is not surprising that many have lost sight of the fact that we are simply moving through another cycle.

"Yes, the market correction and downturn of this property cycle were nothing short of terrifying for speculators and those investors who had overextended themselves financially. And the long, slow recovery has been painful for even the most prudent investors. But the cycle is turning, as it always does, and the market will again experience an upturn.

"What remained uncertain wass when the upturn will commence - many predict only towards the end of 2012; what level property price inflation will reach before the next market correction; and how long the upturn will last."

The question arises: How can a property investor protect a portfolio against the ravages of the property cycle?

"Many property investors do attempt to 'time' the market, but this is akin to speculation. The 2004 boom and this long, protracted recovery provide ample proof that 'timing' the market can be a dangerous game," comments Du Toit.

"Professional - and thus successful - property investors take a long-term view of their investment and the market. They don't speculate; they are building sustainable property investment businesses. This includes keeping an eye on the property cycle, but their focus is not on 'timing' the market, but rather finding the right investment properties that will yield an ongoing passive income and capital growth over the long term. Seasoned and professional property investors know that these investment properties can be found regardless of where we are in the property cycle."

Du Toit explained that professional property investors did not simply acquire properties, they acquired property assets with long-term income-generating potential.

"In layman's terms, this approach can be compared to buying a cow. You can either keep the cow for milking over the long term, or you can sell it quickly at the highest price for slaughtering. If you acquire a cow for milking, you will have an asset, which is appreciating in value, and you will benefit from the milk it produces on an ongoing basis for years to come. If you sell the cow for slaughtering, you might make a quick 'killing' - to use the terminology speculators are fond of. But you may not, particularly if several other cow owners have the same idea. Either way, both the cow, as an asset, and the milk it would have produced over the long term, are gone."

Du Toit notes that a property should be acquired as a cash cow.

"The intention is to hold the property over the long term, milking its ability to produce a passive monthly income that keeps pace with inflation year after year.

"While the property will also appreciate in value, this is regarded as an added bonus, since the objective is not to sell the cash cow, but rather to milk it. This approach is almost immune to the property cycles, since regardless of whether property prices are rising or falling, there will always be demand for good entry-level rental properties in well-established and growing areas.

"And while capital appreciation is not the main objective, investors are richly rewarded for their patience and long-term perspective by superior capital growth over the years, as the ups and downs average out, producing a steady upward trend in property price inflation."

This, clearly, was an entirely different approach when compared to speculating, in which property investors try to "time" the market by buying at high prices, and hope to "make a killing" by selling even higher in the short term.

Du Toit says that while fortunes have been made in this way, it is a high risk approach that has certainly seen many investors lose their investments, and has given many South Africans a distorted understanding of property investment.

"Property investment - acquiring property assets that can be 'milked' over the long term for their income-generating potential - may not be as thrilling and exciting as wheeling and dealing with properties, timing the market and making a killing.

"But it is a proven, tried-and-tested recipe for virtually failsafe property investment. And it is a system that allows investors to sleep peacefully at night, knowing that wherever we are in the property cycle, whatever highs or lows may be reached during an upturn or a downturn, or the duration thereof, their properties are generating an inflation-linked passive income, and in the long term, even their most optimistic capital appreciation expectations will be realised."

This article is to inform and educate, not to advise.

Property investors becoming 'jittery'

The spate of comments from several of the world’s leading central bankers, including from South African Reserve Bank, warning that recovery from the financial crisis will be protracted and that there are real risks in the European banking system, which "poses a great threat to global financial stability”, is anticipated to make investors jittery says Auction Alliance CEO, Rael Levitt.

Marcus warns that even a partial debt default by troubled EU economies could trigger a “systemic banking crisis”. Her view that there are implications for the domestic economy is already unnerving investors and making them ask what the Reserve Bank will do about rising inflation.

A crisis in Greece has been temporarily averted, but according to Marcus, threats remain, not only from Greece but from other peripheral euro zone economies. "These unusually negative comments emanating from the SARB make one think that interest rates will rise sooner than originally predicted and banks may slowdown further on new funding", says Levitt.

The news about the economy seems to be worsening and people across the world are concerned that they will be personally affected by it. "When you consider how the cost of living has escalated, people have in actual fact been affected by the current economic turmoil and despite low interest rates, residential property prices have not risen".

According to Levitt, "there are many ways to stay financially solvent in bad economic times, and although it may not be easy, for some, it can be a time of great opportunity". The most important step is to curtail unnecessary spending and start investing smartly by taking advantage of volatile markets.

‘’Currently, interest rates on savings accounts are not ideal, but some gains are better than none at all. Having a savings account, or at the very least an emergency fund, is a smart decision in today’s economy and can protect you in the event of a further global financial meltdown or if a personal crisis strikes. Paying down any high interest rates debts should be a priority right now, particularly if they are draining your finances every month. If you do have a problem with a high debt to income ratio, you may want to consider a consolidation loan to keep those interest rates in check and to help you save money each month’’, says Levitt.

Levitt advises that if you want to keep growing your finances in hard times, there are several methods that can be utilised to fight rising inflation. The most common one is housing, given the current state of property values and the vast amount of distressed sales. "This is a great time to pick up an extra house if you have the funds, and this can easily be turned into a rental property that will generate income", says Levitt whose company was founded in 1992, in the midst of a global financial downturn.

Navigating the waters of uncertainty is never easy, particularly when potential sovereign debt failures are the talk of the entire world. However, if you watch your spending and take the time to see how you can make your money work for you, these are the times when real money is made. Investors in downturns take refuge in real estate which will rise with inflation and can be purchased at great prices. The golden period to get into the market comes up whenever markets get jittery", says Levitt.

Six Reasons NOT to buy property

...and why none of them hold much water।

We often hear about real estate investors who have been very successful in building wealth-creating portfolios। We may believe that they have some very special skill or ability, that there is something they know which nobody else does. At other times, we think it was pure luck or coincidence that an investor succeeded, that circumstances have since changed or that it just can't be done. Our cynicism encourages us to do nothing, to avoid the risk.

Yet history proves that doing nothing could be the most risky of all। Apart from the missed wealth creating opportunities, doing nothing translates into a lack of self-development, a missed chance to learn and grow. If we delve deeper, it is clear that most of the reasons people use not to invest are actually based more on emotion than business savvy. We rationalise our fear using calculated arguments as to why it can't or won't work. But the truth is that none of these arguments really hold much validity.

So let's discuss the top six reasons why people decide not to invest in property। And lay them to rest-once and for all.

Reason # 1: Investing in property is risky

Fact: There is a certain level of risk in every investment-and property is no exception। But investing all your money in the bank (or even worse under the mattress) may be the most risky of all as the returns barely keep up with inflation. Also bricks and mortar is more tangible than stocks and you can take out insurance against fires or floods. You can also protect your asset against your death or disability. And yes, there is now even insurance available to cover landlords for non-paying tenants!

Reason # 2: I don't have the time

Fact: We all manage to find the time to do things we really want to do. Time management involves prioritising things that are more important. Anyway, you don't need to do it all yourself. Build a team of competent management agents, brokers and mortgage originators (yes, there are some out there!) and let their specialist skills work for you.

Reason # 3: I don't have the money

Fact: You DON'T need money to make money। Even in a market where 100% bonds are not widely offered, a good below market value deal will attract finance from investors। Network with people who share your passion for property and these investment opportunities will present themselves।

Reason # 4: Below market-value properties don't exist

Fact: No matter what the stage of the property life-cycle, there will always be value for money deals। The key is to identify initially whether the seller is motivated and only negotiate with motivated sellers. As long as there is divorce, relocation or excessive debt, motivated sellers will always be out there.

Reason # 5: The property market will go down

Fact: The property market has never gone down over the medium or long term. Does that mean that it won't in the future? Probably not, simply because property prices rise in relation to income levels which increase over time. Even political factors, crime and other excuses people use not to invest, have not had a serious impact on our or overseas markets. At times, these factors often have the reverse effect-lifting prices as investors choose the safer haven of bricks and mortar.
And if prices DO go down over the next few years? Who cares! Buying for the rental yield and at below market value still ensures the investor comes out trumps।

Reason # 6: I don't know where to begin

Fact: You only learn through action. Educate yourself and when you feel a good opportunity presents itself, take the plunge. It may not be the best deal you may ever do but it will be the most important in terms of confidence. Luckily, over the long term, property is very forgiving of peoples` mistakes.

Overview on South Africa property market

14 April 2010

Where it's at and where it's going.

The South African property market is slowly gaining traction and provided lending institutions loan in a responsible manner and interest rates stay down, the market should grow by a positive, albeit modest, 9% this year.

Despite predictions that the local property market wouldn't start showing signs of recovery until 2010, things started to look up towards the end of last year and the market is already on an upward trend.

We were all prepared for a particularly gloomy 2009 but the market stabilised by September and house prices began rising by the end of the year. We believe that 2009 was nowhere near as bad as had been predicted. In fact, we believe it was actually a relatively good year for the South African property market, particularly in comparison with 2008, which was pretty dismal indeed.
Overall, the volume of property sales rose by 46% and turnover increased by 42%. House prices declined by 5% owing to the first two quarters of the year. Geffen is confident that the housing market will maintain this upward momentum as long as interest rates stay down.

There is still an excess of housing stock, particularly in certain price categories. This is due to repossessions and houses up for sale by owners who found they'd financially over-extended themselves as the recession took hold. Furthermore, stricter lending criteria and the National Credit Act have made it difficult for potential buyers to secure housing loans.

On the whole, there was waning interest in property because people were either too financially-strapped to buy houses or, against the backdrop of what was happening in the global housing market, decided that investing in property was too risky. All of this contributed to a lack of buyers and an over-supply of houses for sale. However, demand is picking up. To give you an example, this year we saw the especially notable sales of a property in Bryanston for R50 million and another in Sandhurst for R35 million. Also, the overall sales volumes being logged by our offices are currently 46% ahead of the volumes recorded at this time last year, and turnover is up a whopping 42%.

A slack in banks' lending criteria would be welcome because it would enable more people to qualify for loans and buy houses.

This would certainly help to stimulate movement and growth in the market. More importantly, it would give more people a chance to own their own home. However, lending institutions must lend responsibly otherwise it could be detrimental.

Geffen's advice to homeowners is to upgrade their properties now while the market is still warming up.

South Africa - Exchange controls: limits and red tape relaxed

PRETORIA - Treasury has announced several measures designed to reduce the administrative burden of exchange controls. The limits of some exchange controls have also been relaxed, allowing individuals and business more freedom to put money overseas.

The Mini-Budget Statement says that South Africa continues to welcome foreign direct investment and encourages local firms that wish to diversify offshore from a domestic base .

One of the proposed reforms is to increase the amount a company may invest offshore tenfold, from the current limit of R50m to R500m. For individuals, the foreign capital allowance has been increased from R2m to R4m. The single discretionary allowance has been increased from R500 000 to R750 000.

The following relaxations are proposed for business transactions:

SA companies will be allowed to invest in Southern African Development Community (SADC) member countries through offshore intermediaries. The relaxation excludes investment in member states that are part of the Common Monetary Area.

Increasing the current R50m limit for company applications to undertake outward investment to R500m. Applications below this limit will be processed by authorised dealers, subject to all existing criteria and reporting obligations.

Removing the 180-day rule requiring companies to convert their foreign exchange into rand. However, South African companies are still required to repatriate export proceeds to South Africa.

Doing away with the R250 000 limit on advance payments for imports.

Allowing South African companies to open foreign bank accounts for permissible purposes without prior approval, subject to reporting obligations.

Replacing the current paper-based monitoring system of exports (Form F178) with a more efficient electronic system in due course.

Treasury is also trying to boost foreign direct investment by relaxing borrowing restrictions for non-residents. It has abolished a rule which restricts borrowing for foreign direct investment by non-residents to a ratio of 3:1. According to this rule, non-residents must invest R1 for every R3 borrowed locally.

After it's abolishment, they will be able to finance 100% of their investment. However, the relaxation does not apply to emigrants, the acquisition of residential properties by non-residents, or any other financial transactions - such as portfolio investments, securities lending, hedging or repurchase agreements - by non residents. For these cases, the existing finance ratio of 1:1 still applies.

More announcements on these reforms will be provided in due course by the Reserve Bank, whose task is to police exchange controls.

Rolling with the punches......

A few months ago the subject of property was the latest buzzword around any braai or lunchtime table. Every person from the local dominee to the gardener wanted to get on into the action & when this was before the New Credit ACT (NCA) many people did.

But then ask yourself the question: When the gardener has 5 properties & he gives you advice on how to sublet your flat in Clifton, shouldn’t you think twice?

And then out of the blue, the NCA is introduced, bank credit dries up & invariably property growth goes into decline. Couple this with an increase in interest rates by a staggering 30% with rental income remaining constant, and you suddenly have a situation where buy-to-let has swine flu & you cannot get rid of it soon enough. And to top it all, we currently sit in a recession which is like the Boks losing to England………it affect all of us!!

So who in their right mind is going to look at property when they’re living day to day?

Here’s some food for thought on why real investors would consider buying in a tough market:

1) In property, you make your money when you buy:

The whole point of property is to buy so that your rental income covers the mortgage pay. And where does the rental income come from? The tenant! So look at what your tenant wants first, then go out and buy the property. You wouldn’t buy a property in De Aar & then expect tenants to fall over themselves wanting to sign the rental contract. (No offence to the people from De Aar, but rental demand might prove to be a little stronger in Joburg or Cape Town)

2) More interest rate reductions, more breathing space for the Landlord:

Since December 08, there has been a cumulative decrease of 4.5% in the interest rates. On a R1m property, this decrease is a saving of more than three thousand Rand per month! So more cash for the owner, means less chance of having to increase the rent which in turn decreases the chances of the tenant of leaving.

3) Property is a good investment – if you have the patience for it:

My personal strategy is to buy property, and never sell. The reason for this is the replacement cost of selling and then having to buy a similar or better property is very rarely achieved. You also have to factor in capital gains tax when you sell & if SARS decides you were speculating, you have to hand over 40% of what you made from the transaction. Building Materials & Labour also keep increasing, so an equivalent property will only get smaller, thereby decreasing the rental which in turn affects your bottom line.

4) Bargain, Bargain, Bargain – but do your homework:

Just because there are more people wanting to sell their properties, doesn’t mean that anything you buy now will net you millions. Markets are imperfect things & due to the flow of information, there is still a competitive advantage of one party over another. So just as word of warning, when supply far outweighs demand, remember to do the calculation ! Does the rent cover the mortgage? No. So move on to the next one.

5) In the long run, property will outperform all other assets:

59% of the world’s wealth is held in property. When Ray A Croc, the owner of McDonalds was asked what business he was in, he didn’t reply with the ‘burger business’. He just smiled and said the ‘property business’. So maybe (and I’m just throwing it out there J), if you stick to property it might not be as easy as selling shares, but at least you know that the chances of a receiving a steady stream of passive income, looks a whole lot better.

So in keeping in mind the points mentioned, remember the words of Warren Buffett, the most successful private investor in the World:

Put your eggs in one basket, watch that basket closely !!