“Francois, our neighbour wants to sell his house. We'd like to build a little property nest egg of our own. Should we buy his property?”
That's a question I received from a family member over the holidays.
I'm sure you've been faced with a similar situation.
Looking at a property that's for sale and wondering whether it would be a good idea to buy it and get started with your very own property rental empire.
The fact is, that property is like any other investment.
There are good investments and there are bad investments in the property sector. So before you make (or avoid making) an investment in property you need to recognise these three principles to investing in property.
Three property investment principles that’ll make you money in the long run
Property Investment Principle #1 – Just because there’s an opportunity doesn’t mean you have to invest
Firstly, and most importantly – just because you’ve discovered a nice house or apartment for sale doesn’t mean you HAVE to buy it at all costs.
One of the biggest problems when you start out investing in property (or stocks for that matter) is that you are over-eager to make that first investment.
Rather be patient and analyse it properly before making a rash decision.
Remember – you need not have a fear of losing out. There are always other opportunities to look at.
Property Investment Principle #2 – Don’t invest just because you ‘like the coffee’
It’s long been a saying in the stock market that if you ‘go to a mall, see a Starbucks and say it’s good coffee, you should buy the share. It’s actually become a mantra of ‘investing in what you know’.
We all like to follow the same pattern when investing in property. Investing in a small apartment we’d never live in ourselves seems illogical – rather buy a house to let in a suburb you live in right?
About stocks and investing Peter Lynch, a well known investment guru, has come out and said: “I never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock’”.
And in the same vein I believe it’s true for property. You need to find the best possible deals, with the highest rental demand. Not necessarily the properties you’d like to live in yourself…
Investing in ‘what you know’, whether it be property or stocks, could lead to badly informed investment decisions.
Property Investment Principle #3 – Understand the numbers…
Never, never buy a property without assessing the deal properly. You need to answer all the following questions:
How will you finance the property (what % debt and what % cash)?
How will interest rate increases affect your investment in terms of debt repayments?
What is your monthly cashflow (loss or profit) when considering finance costs, rental income, levies and taxes?
To do a quick, back of the matchbox calculation on whether the investment is a good one do the following:
Take monthly rent, subtract levies, rates and taxes and times this by 12.
Divide this figure by the property selling price and multiply by 100.
So for example: A Property has rental income of R4,200. Levies R849 and rates R207. So you get R3,144. Times twelve you get R37,728.
The property selling price was R357,500. Divide R37,728 by R357,500 and multiply by 100 and you get 10.55%.
You ideally want the answer to be 10% or higher. Any lower than 10% and you’re buying a property that won’t make you money. And you’d be better off putting cash into the bank at the end of the day…
So, next time you consider buying a property make sure you follow these principles, and do the math and I assure you – it will be a good investment.
Here’s to unleashing real value,