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.

Time for a Rate Cut ?

Thu, 06 May 2010 08:05

Difficulties getting a bond have been cited as a good reason for a further drop in interest rates but the Reserve Bank has hinted the scope for further cuts is limited.

Rawson Properties chairman Bill Rawson says in his 39 years in property, “it has seldom been more difficult to get a bond”. He says the applicant has to show that over a period of at least six months his cash flow has been able to support an outlay equal to what he would pay on his bond.
“If, for example, he has been paying R6000 a month on rent and now wants to invest R10000 a month in a home, he will have to produce very substantial evidence that he will be under no pressure to pay the extra amount.

“Impressive assets invested elsewhere will not make his application more likely to succeed: the banks look only at cash flow. They also insist on a squeaky-clean, problem-free debt-paying record, even on minor accounts such as those for retail outlets.”

Reserve Bank governor Gill Marcus said recently that interest rates were likely to stay steady “for some time”, damping speculation of another cut this month.

Marcus warned analysts not to jump to conclusions based on February’s surprise fall in retail sales, which merely confirmed “the fragile nature” of consumer spending. “The scope for further easing is limited, and the repurchase rate is likely to remain stable for some time,” she said.

Before the Bank’s last policy meeting, Rawson says, nine out of 10 economists predicted a further cut was very unlikely, but were gratified when the Bank did, in fact, cut rates. “Now, with the rate already reduced by 5,5 percentage points since December 2008 and with prime at only 10 percent, it could be argued a further cut is not needed. In my view, however, it is absolutely essential. We need it not only to help the housing market move faster, but also to boost the economy as a whole.”

Statistics SA’s January and February figures, says Rawson, show that consumer spending was down 1,5 percent and until this begins to rise there can be no significant economic upturn.
“Many emerging middle-class people are carrying far too much debt but there is a growing appreciation in some sectors that this must be reduced, especially if you hope to become a homeowner. A drop in rates will help those paying off debts, particularly those on high higher-purchase rates.”

Low interest rates, he says, will encourage people to find investments other than equities and enhance the appeal of property.

“Every now and then one reads in the press that equities have performed better than property. What these surveys do not show you is that the returns on property are usually better than those on shares for the simple reason that the majority of property buyers are bonded: their actual capital outlay is fairly small but their rents or their profits on their sales are highly satisfactory as they relate to the total value of the property.”

A further good reason for a drop in the interest rate, Rawson, says, is that, in boosting the economy, it would boost job creation. “I strongly suspect the official unemployment figures are way below the real figures. In many rural areas people are starving. In Grahamstown, I am told, more than 60 percent of employable males are jobless. All the indicators, therefore, point to the May meeting - cutting the rate by a further half point, giving us the lowest interest rate in 40 years … ” and we certainly need it at this stage in SA’s economic recovery.”

Source: Business Day