The statements, views, thoughts, and/or opinions expressed in this article should not be construed as fact, or relied upon as advice. Any action taken based on the information provided in this article is strictly at your own risk.
When it comes to entering or furthering a career in property investment, do your research, make sure your investment is sound, and find out about the different types of funding and what is right for you. Professor François Viruly, property economist, associate professor and course convenor on the University of Cape Town Property Development and Investment short course provides information on how to improve your chances of becoming a successful property investor.
Q: Where can you get good advice about property investment?
A: There are a number of professionals in the property sector who are able to provide advice – property brokers, valuers and other investors in the market. It is equally useful to consider real estate programmes that provide an introduction to the sector. In the early phase of building a portfolio it is useful to link up with an investor who has acquired experience in the sector.
Q: What are the key factors to consider when drawing up a business plan for property investment?
A: It is important to remember that every property investment should be seen as a separate business, and attention should be given to financial as well as non-financial issues. This includes the marketing of the business/property and ensuring that a product is delivered that meets the needs of the market. When drawing up a business plan, it is imperative to consider how value will be derived from the investment. This could be in terms of securing the necessary tenants and ensuring that an acceptable relationship is maintained between rentals collected and operating costs.
Q: When starting your career in property investment, is it advisable to invest in commercial or residential property?
A: I would suggest that one starts with a small property – namely a residential flat. It may even mean letting part of an existing property that one lives in. The commercial sector is somewhat more complex and often requires specific skills. Of course, there is always the opportunity to invest in the listed property sector. The listed sector offers an opportunity to invest indirectly in some of the top residential and commercial properties in SA.
Q: For a new investor, would you recommend investing in property or property development?
A: The property development sector requires specific skills and the risks of undertaking a property development can be considerable. A new investor in the property sector should probably be focussing on existing investments rather than the development of new stock.
If you choose to enter the property sector it is sometimes useful to consider partnering with someone with the necessary experience. This is particularly true when undertaking a development for the first time.
Q: What are the different funding options available to new investors?
A: One of the great things about investing in property is that you can often do so by securing debt funding and require a limited amount of capital to get started . In the case of residential properties, debt funding can be equal to the value of the property being acquired. For residential properties, access bonds often provide an attractive opportunity to fund an investment. Increasingly, opportunities exist for individuals to combine their income to secure a loan but legal arrangements between the partners should carefully be determined. If you enter into an investment with a partner, ensure that there is a clear agreement regarding who owns or will own what – do the parties for instance have an undivided share in the property? Or, do the parties own specific sections of the property? It is equally important to understand how parties can exit the investment.
Q: What are your suggested approaches for securing finance for an investment property?
A: The financing of properties can come from numerous sources. The spectrum ranges from family members, other investors and the banking sector. It is important to differentiate between capital and debt. Capital can be raised from other investors, while debt will tend to be secured through the banking sector. In raising debt, it is also possible to use a mortgage originator who will deal with numerous financial institutions.
Q: What is the best way to structure finance to pay it off asap?
A: The structuring of finance should largely reflect the cash flow of the property investment and the security that the investor can provide. One should ensure that there is always sufficient cash flow (arising from the leases) to service the debt that has been secured. The implications of accelerated debt repayment should be considered as it can result in considerable savings and opportunities to increase an investment portfolio.
Q: How do you ensure your property makes money?
A: The most important point is to acquire a property at the correct value. It is therefore advisable to undertake a formal valuation of the property before it is acquired. Once the property is acquired, two issues become important. First, the property should be appropriately let at the correct rental and escalations. In this regard it is important to ensure that a professional lease is drafted and signed by the parties. The second challenge for the property investor is to ensure that operating costs are kept under control through rigorous property management processes.
Q: How do you make sure your investment is sound?
A: One of the most important questions to ask is whether the property would be able to secure tenants – ultimately it is about the user. It is equally important that the right price is paid for a property. The point is often made that property investment is all about location, while this is true, it is important that the property is acquired at the correct point on the property cycle.
Q: How do you go about taking out an additional bond?
A: The degree of bank debt funding will be determined by numerous factors. These include the size of the cash flow derived by a property relative to the required debt repayment. Often this is determined by loan-to-value parameters. Moreover, the decision to offer a second bond will be influenced by the surety that can be secured by the lender.
Q: Where are the best investment opportunities?
A: The commercial property market is presently being affected by the poor performance of the economy. One should expect that a correlation exists between the size of the economy and the demand for space. In addition, the office sector, in particular, is oversupplied at present, which is placing a negative impact on rentals and vacancy rates. For the property cycle to move upwards investor confidence across the board needs to improve. In the commercial property sector, investors are showing interest in the logistics sector which is being supported by e-retailing. In the residential sector strong capital growth is being experienced in the lower tiers of the property sector – namely properties valued under R1 million. It is also in this sector that yields are attractive.
Q: Where do you see the property market in the next 5–10 years?
A: The Fourth Industrial Revolution is expected to have an important impact in the way that the property sector functions going forward . Through proptech initiatives, the industry is becoming more transparent and transaction costs are expected to decline. E-retailing is also expected to fundamentally alter the way shopping centres function. In the residential sector, there is a growing demand for co-living opportunities and the combination of developments that offer an attractive mix of home, work and play.
GetSmarter is a 2U, Inc. brand.