What Is Real Estate Investment?
Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. Some investors actively develop, improve or renovate properties to make more money from them.
Foreclosure Of Real Estate Investments
Some individuals and companies focus their investment strategy on purchasing properties that are in some stage of foreclosure. A property is considered in pre-foreclosure when the homeowner has defaulted on their mortgage loan. Formal foreclosure processes vary by state and may be judicial or non-judicial, which affects the length of time the property is in the pre-foreclosure phase.
Once the formal foreclosure processes are underway, these properties can be purchased at a public sale, usually called a foreclosure auction or sheriff’s sale. If the property does not sell at the public auction, then ownership of the property is returned to the lender. Properties at this phase are called Real Estate Owned, or REOs.
Once a property is sold at the foreclosure auction or as an REO, the lender may keep the proceeds to satisfy their mortgage and any legal costs that they incurred minus the costs of the sale and any outstanding tax obligations.
Investing In Real Estate
If you’ve ever had a landlord, you probably don’t dream of being one: Fielding calls about oversize bugs and overflowing toilets doesn’t seem like the most glamorous job.
But done right, real estate investing can be lucrative — even now that we’ve shifted to an environment of higher interest rates. Investing in real estate can also help diversify your existing investment portfolio and be an additional income stream. And many of the best real estate investments don’t require showing up at a tenant’s every beck and call.
The trouble is that many new investors don’t know where or how to invest in real estate.
How To Invest In Real Estate In South Africa
1. Buy-to-let is the bread and butter of property investment
Buy-to-let is the go-to option for investors, allowing you to generate monthly income from properties in your portfolio. That’s not to say there are no risks involved, but with careful planning, buy-to-let provides a reliable source of revenue in the long-term.
If the property is bonded, at the beginning, you’ll be using the rental income to pay off the bond on the property, as well as whatever other expenses go along with it, such as maintenance costs. As such, the potential rental yield will be your primary concern when determining whether to invest in a property.
“It’s an important figure and it’s simple to calculate,” says Rhys Dyer, CEO of ooba home loans, South Africa’s largest home loan comparison service. “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 (R10 000 a month) would be yielding 12%.”
You can get an idea of prospective rental yield on a property by looking at rental prices for other properties in the area. Generally, one-bedroom and studio apartments make for a good buy-to-let investment, as those property types have delivered consistently over the course of 12 years.
2. Consider buying and renovating properties to boost value
Purchasing older properties and conducting smart renovations to boost their value is another shrewd investment strategy, and one that happens to be quite fulfilling as well, as you are able to apply your own creative talents to the task.
As a general rule, kitchen renovations are most effective at boosting property value, as it’s often said that kitchens sell properties. They can get expensive though, whereas bathroom renovations provide a relatively cheap way to enhance the property’s aesthetic appeal.
3. Shop around for the best deals on bonds
In most cases, you’ll need to obtain funding before investing in a property, which usually comes in the form of a home loan granted by the bank. However, each bank has different lending criteria, some of which may result in more favourable interest rates for you.
It pays to shop around for the best deal. This is made easier if you acquire the services of a bond originator, such as ooba home loans, who can apply to multiple banks on your behalf.
4. Take note of property types that are performing well in the market
Property investors need to stay abreast of trends in the property market, which can be affected by political and economic factors. For example, sectional title properties generally perform well in South Africa due to their popularity with students and first-time home buyers. Properties in gated communities are also expected to perform well, due to security concerns.
Trends also vary by area. The current price deflation in the Cape Town market has been especially prevalent in upmarket areas like Sea Point and Camps Bay, which experienced a +5% decrease over the last year, according to The South African. This makes those districts ripe for investment.
5. But also diversify
That said, don’t allow yourself to become too fixated on certain property types or areas. Investing in a broad range of properties, spread across different areas, will make your portfolio less susceptible to market fluctuations.
6. Take it slow
Remember that property investment is a long game; the slow and steady alternative to playing the stock market. You shouldn’t be in this industry if you’re looking to get rich quick.
It requires a long-term strategy and planning. Selling properties is generally not advised, not even to fund the purchase of another property. The various legal costs, fees, taxes, and so on can take a sizeable chunk out of the profits, so the smarter option is almost always to keep the property and use it to generate income in the long-term.
7. Consider flipping investment properties
This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV. It’s also more expensive than it used to be, given the current higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash.
“There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do,” says Meyer.
His suggestion: Find an experienced partner. “Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project,” he says.
The other risk of flipping is that the longer you hold the property, the less money you make because you may be paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you don’t mind a little dust.
