Property is a hot commodity and rarely does an investment conversation unfold without delving into a discussion around market trends and buyer appetite.
One of the questions that tends to crop up regularly is how best to maximise a property investment, whether it’s for primary residence or as an investment property. The beauty about residential property is that it can serve both purposes – a home can be both a great place to live in, while simultaneously, if you have purchased in a sound location and you are clever with design, décor and maintenance, it can also escalate in value over time.
The rule of thumb for a primary residence is that this property is first and foremost a home and secondly an investment. From a general living perspective, homes will be customised to suit your individual needs, but always be mindful of enhancing the features of your property in a way that could also boost its value. To start with, a neutral palette appeals to a wider buyer pool than a home that is too colourful and also bear in mind that light-filled homes are more appealing than dark homes, while space carries far more weight than clutter. On the whole, the idea is to create space and light in your home, by opening up wherever possible to maximise flow.
Painting is literally a magic wand, and good décor and decluttered furnishings can transform a home. “Bring plants into your living spaces and integrate your outdoor living areas into the home. Create a favourable first impression by ensuring that your verge is neat and presentable and your driveway is well-maintained.
The features that today’s buyers seek are open-plan living areas, modern kitchens and bathrooms, and good flow which creates effortless indoor-outdoor living spaces – highly desirable in South Africa with its pleasant climate and outdoor lifestyle. Outdoor open spaces such as a patio or level garden area, even if modestly proportioned, make a property more appealing.
If you are looking to add value to an existing home, always consider its ‘bones’. Structural additions can be costly, so ideally, you want to start with a canvas that has good bones. This refers to good fundamental structure – in other words, a home that has the basics right, most notably, living areas and kitchens are well-positioned within the home, so that with a few small changes they will flow to the outdoor entertainment area.
The home in this photograph had all the rooms in the right places, but each room was separated by walls, however, a renovation to remove the walls opened up the area completely, enabling great flow to the outdoors. Removing walls is generally more cost-effective than adding on additional coverage, so remove one or two internal walls and this will create instant flow and bring light into the home.
From a finishing perspective, bathrooms, kitchens and built-in-cupboards can certainly add value to your property. Consider upgrades in these rooms first, and then paint the rest of the home to give it a facelift. Floors also play an important aesthetic role - try to keep these consistent throughout the home. If possible, don’t mix and match as one look throughout works best.
In uMhlanga, suburbs like Izinga which are newer, tend to already have modern, open-plan homes with good flow, so the key here is ongoing maintenance and small upgrades over time. Décor gets outdated quite quickly, so keep it on trend with small tweaks like new cushions and one or two occasional chairs that have modern flair. Privacy is also important on estates like this, so plant your boundary areas and try to create your own oasis and haven within the estate.
From a broader perspective, if you’re looking to invest in property generally, then you will need to consider both your potential returns as well as the potential capital growth on your asset. Your strategy may be to buy, renovate and flip, or it may be simply to buy and hold either to live in or rent out for additional income and as an investment property.
If renovating is your forte, always consider the ceiling price for the area that you’re investing in, which is where an experienced and informed real estate agent can assist. The last thing you want is to overcapitalise and then struggle to sell. When renovating, try to complete the building within two months so that you can flip quickly and sell the home within six months – the quicker the better to reduce holding costs.
From a rental perspective, ‘gearing’ is my favourite word and I suggest that you consider investing in multiple smaller properties, gear them and let them pay for themselves over time. In my opinion, this strategy is far better than putting all your eggs into one more lavish basket. Take your budget and spread it over a mix of properties, rather than tying it up into a single property. If you want to minimise risk then property investing, like all investment, requires diversification.
I suggest you look at good areas with high rental demand in hotspots – like Durban North, La Lucia, uMhlanga and Cape Town, for example. Then acquire one or two-bedroom apartments in good complexes. Sometimes one-bedroom units actually generate higher yields, so I would prefer to have two one-bedroom units than one two-bedroom unit.
Some investors like to buy off-plan and this is also a good strategy - put down a deposit, wait a few years to take transfer, and then enjoy the price escalations as the development matures, which means that the value of your unit appreciates at the same time. If you have the means available to invest in more than five off-plan units, there are tax savings available, making the investments even more attractive.
The current low interest rate environment makes it a good time to buy a property for investment purposes such as a buy-to-let option, as it provides favourable terms for gearing your investment purchase by taking a home loan on the property. Here are some points to consider why this would be a good investment strategy.
Getting the best deal on your bond is a crucial part of maximising the return on a buy-to-let investment, and you’ll need a home loan specifically designed for buy-to-let. Existing bondholders can also apply for a second bond. Typically, as a small to medium investor, you should have some equity saved from other sources. You would normally set up your financing in such a way that your second bond is paid off or cash flow neutral in order to take the long payment off the bond and slowly grow equity. With rental increases and positive cash flow, you will then develop equity to invest into the next property.
While 100% home loan finance is available depending on your credit risk profile and affordability assessment, lenders generally expect borrowers to put down larger deposits on buy-to-let bonds. “You may find it difficult to get away with a deposit of less than 10% of the purchase price and, for the best deals, you’ll need as much as 20%, depending on the purchase price and your risk profile.
Bear in mind that most banks do not take potential rental income on the property into account when assessing your bond application. However, if they do approve the home loan the rental income you generate on the property will of course help you pay it off. The most competitively priced home loan will ensure that your decision of gearing your purchase through accessing home finance will make financial sense.
Buy-to-let investors, it’s all about the rental yield on their properties or their property portfolios The yield is simply the annual rent you’re earning on the property divided by its value, expressed as a percentage. “So a house worth R1 million, on which the annual rent is R120 000 or R10 000 a month, would yield 12%.
However, it’s important to note that this is a gross yield, meaning it’s calculated before costs. Out of that rent, you’ll have to make bond repayments, cover building insurance premiums, find money for maintenance and possibly pay a letting agent’s fees. If we assume those costs come to R8 000 a month, leaving you R2 000 profit, that reduces the net yield to 2.4% a year, and remember that you’ll probably need to pay income tax on this too.
This example shows it is essential to do your sums before embarking on a buy-to-let property investment. You need to be sure you can earn enough rent to make the investment worthwhile, and factor in safety margins for emergencies such as a large, unexpected bill or a period when you don’t have a tenant – or when the tenant fails to pay the rent. The bond is the largest cost for most buy-to-let investors, but don’t forget about other bills too.
Buy-to-let investors have the same bond options as other borrowers – whether to go for a fixed or variable rate, for example, and at what level to gear their purchase by accessing a home loan instead of paying cash, thereby creating some liquidity and a taxable expense to offset against their rental income, in so doing creating a tax efficient option.
In summary, property is such an exciting asset class, because there are so many options available. Whether you are simply wanting to add value to your home, or wishing to build up a property portfolio, weigh in on area, costs, returns and capital growth and ask your local estate agent to give you some comparative market statistics to assist you in making an informed decision.