Investment strategy | 9 professional tips for new property investors
When one looks at any list of High-Net-Worth Individuals (HNWI), the one common denominator is real estate and, according to GlobalData, they allocate an average of 11.2% of their investment share to property, with residential real estate being the most popular sector within the asset class.
READ: Understanding the difference between a homebuyer and property investor
Arnold Maritz, Co-Principal for Lew Geffen Sotheby's International Realty in Cape Town's Southern Suburbs says it comes as no surprise then that, for many aspirant investors, the dream of building wealth and financial freedom is often the driver behind the desire to establish and grow a property portfolio.
"Starting out in property is relatively easy and one doesn't need much money to do so, however, making the jump from owning one or two properties to a real estate portfolio is a little more complex.
"However, if you take the right approach, do your homework and consult with experienced professionals, building a property portfolio can be a very profitable long-term investment."
You're not buying a home in which to raise your family, you are making an investment so each purchase must be approached logically and systematically with your long-term financial goals in mind and Maritz advises the following steps for a strong investment strategy:
1. Make a plan
Approach your new endeavour as a business professional from the get-go by devising a business plan and establishing both short- and long-term goals.
This enables you to visualise the big picture which not only helps you maintain focus on the important goals rather than on any minor setbacks, it also prevents you from getting side tracked.
The plan should include factors such as estimated outlays and inflows of cash from rentals, how many units would yield optimum returns, when to refurbish or upgrade, target demographic changes and potential market shifts and anything else that could impact your investment over time.
2. Start with one strong investment
How you begin your portfolio can strongly determine future growth and success so it's essential to ensure that your first investment is the right deal.
If done correctly and the numbers stack up, you'll soon move on to your next acquisition and so forth, but if your first investment is a dud, it can not only scupper your plans, it can also leave you in a precarious financial situation from which you may not recover sufficiently in order to continue.
Remember that it's usually best to learn to walk before you run so take the time to ensure your first investment is a solid foundation for your future portfolio.
READ: Becoming a property mogul in South Africa
3. Stay educated, stay abreast
As with any business, it is important to remain current with the laws, regulations, terminology, and trends that form the basis of your investment industry because if you fall behind, you not only risk losing momentum, but could also be vulnerable to legal ramifications if laws are inadvertently ignored or broken.
The most successful real estate investors are those who stay educated and are able to adapt to any regulatory changes, emergent economic trends and changes in tax or lending laws.
4. Understand the risks
Forewarned is forearmed and prudent real estate investors are aware of, and understand, all the potential risks so that they are able to adjust their businesses to reduce the risks, avoid being blindsided and minimise the impact they could have should the unavoidable occur.
5. Get your finances in order
In a competitive market like real estate, you need to have all your financial ducks in a row as you simply can't afford to leave your borrowing until the last minute.
The best deals won't wait for you get it together and having financial evidence you can present to the seller or estate agent, puts you in a stronger position as a serious buyer who can compete - and complete - quickly.
READ: How to manage and prepare your credit score before applying for a bond
6. Know your market
If you are entering the rental market, it's essential that you know exactly who you will be renting to - what's their lifestyle, do they use public transport or need to be near major commuter links, do they need off street parking for more than one car? Is their lifestyle quiet or busy? What's their average age and their family status?
Without this info, it's impossible to narrow down the type of property that will give the best return for your type of investment and understanding who your ideal tenant is prevents you wasting time chasing unsuitable properties.
7. Know your seller
Whether you're investing in property as a business prospect or as a long-term home for yourself, you need to buy at the lowest price possible and buying from a motivated seller often gives you a stronger negotiating angle. For investors, the best price is below the standard market rate.
8. Is it really a good deal?
The property may be visually appealing, very well-priced and in a great neighbourhood but is it structurally sound or will it be a money pit?
High ongoing maintenance costs can significantly reduce the return on an investment property so take a close look at things like the type of roof, wall surfaces, quality of fixtures and fittings, garden and pools etc.
For sectional title properties, make sure the body corporate's financial standing is solid and the monthly levy amounts are also important - the higher the levy the lower your return.
READ: Here's how homeowners' associations can cut costs and boost income
9. Choose location carefully
Over and above making sure the property you're keen on is structurally sound, location is the next most important factor. For a successful buy-to-let, the ideal area is one with a high rental demand and limited supply but this can change from street to street within the same area, so do your homework. Location also impacts resale, so bear in mind how easy it would be to sell should you decide to do so at a future date.
"Because property is a tangible asset as well as one of life's essential commodities, investing in real estate remains one of the best ways to accumulate wealth, both in terms of appreciation in market value as well as generating a reliable monthly cash flow," says Maritz.
"However, it's by no means bulletproof nor a sure thing and it requires expertise, planning and focus to be really successful in this sector. But, with a bit of luck and careful planning, you can join the many investors with profitable property portfolios."
22 Mar 2023
Author Property24