Is now a good time to buy investment property?

Anyone giving advice on the best time to buy property, bitcoin, stocks, commodities are more than a little dodgy in our view. Don’t believe the gurus. Most often they have a vested interest in stimulating the market or selling you their secret sauce. So sorry, we won’t be giving you the latest vision from a crystal ball.

But there are some basic rules for property investment that you can work with.

Over the last century, property values have gone up and down but have pretty much kept ahead of inflation. The simple explanation is that demand for housing is growing in line with our population, and expansion of the economy (GDP).

New homes are built when the cost of construction and land is cheaper than what second hand houses are selling for. If demand exceeds supply, prices rise above inflation, and developers, speculators, bakkie builders, slum lords and the like spring into action. Supply of new houses flood the market in the categories where the price differential is the largest, until there is oversupply. Then, the price deflates till the creators of new homes go back into hibernation.

Do this exercise for yourself before buying. What would it cost you to build a similar home, including the land and all fees in your chosen area. If the second-hand house is cheaper or has far better value for money, then you are probably on the right side of the curve and the house prices are running below inflation. So, there is a high probability that the price will increase in the future to correct.

But what if you are an investor and want to buy for investment purposes?

This is even easier to explain. If you are a true investor you will value cash flow (rental income) above capital growth. If you are the other type looking only at capital growth, rather call yourself a speculator or gambler. Cash flow is money in the bank, growth in the value of the property is crystal ball stuff.

When do I buy and at what price?

The answer is simple. Decide what your minimum target return is. If you have cash in the bank and are earning say 6%, and paying tax on that, and you want to reinvest that capital in a property then find property where the nett rental income (the rental income less your direct expenses) is equal to or more than 6%. If it is, then tick box number one.

Next, consider the rental opportunity and risk. Is the area dying or growing? If there is good growth underpinning the area, jobs, schools, new roads, then the chance of replacing existing tenants is good, so tick box number two. Remember that this is your cash on cash return. But what’s different from cash in the bank is that instead of just getting you a monthly rental return of 6%, the property is also increasing in value.

How to leverage your property

That brings me to a final point. The gambler in you is crying out for a bigger return, and the good news is you don’t have to dabble in bitcoin to achieve that. You can improve your return and manage your tax more efficiently using leverage. Decide how much income you are prepared to re-invest from your rental income, then calculate how much you can leverage your purchase by taking out a mortgage bond. If your investment property increases in value ONLY by inflation, say 5%, and you get 6% cash return from the rental income, your gross cash on cash return is 11%. Not bad, but what if you took out half that against a mortgage bond and re-invested the nett rental income to pay the bond. The fact is that your return on the cash invested can stay the same even with a loan against the purchase price. But that is a subject for another day.

Also, remember that buying a home has other attributes. It is not all about returns, or forced savings for retirement. It is also a home to raise a family, it’s about life, and love. And that you can’t put a number on.