What are the advantages of investing in real estate?
There are many reasons why property investment has become increasingly popular. For starters, investing in Real Estate gives you a tangible asset. You are purchasing a physical, immovable property that if correctly maintained, and let out, can produce a steady, fairly-predictable cash flow indefinitely.
While property investment is not free of risk, it is lower risk than investing in stocks and bonds that can be negatively affected by market fluctuations, or problems in the organisations in which you hold shares. While share portfolios can be lost in their entirety, when you invest in a physical property the value rarely drops to zero. You should be able to recover at least a portion of your investment, even if the property market is affected by an economic downturn.
While there is no guarantee that your property’s value will appreciate, land and buildings are typically appreciating assets, particularly over the medium to long-term. That’s why it is important to do your homework, carefully researching the property’s location, local amenities, business environment and what the quality of life is like for residents, among other factors, before signing the offer to purchase. Owners who decide to sell their property after a number of years could expect to see a return on their investment.
As property is an appreciating asset it is often seen as a hedge against inflation. As inflation increases, your rental income and property value increase. Generally speaking, as the cost of living increases, so do the returns on your property investment.
If you have a strong property portfolio, it could provide a stable future for your family. If you’re planning on including property as a legacy vehicle then it’s a good idea to discuss it with your financial advisor so that you can plan a strategy that will minimise taxes and duties on the closing of your estate.
Successful property investors know that real estate is not a short-term investment. If you’ve purchased a property with the intention of renting it out, the theory is that your tenants will essentially be paying your mortgage bond. Remember though that there are additional costs involved in homeownership, such as levies, rates, and taxes on that property, and that positive cash flow is usually only seen once a good portion of the mortgage bond has been paid off, except if you’ve purchased a great deal. Your highest returns will come once the property is paid-off, and the rental income is then used to cover the aforementioned additional costs only, leaving you with a percentage of the rent as income.
What type of property investment is right for you?
In our view, when deciding what type of property to buy, your focus must first be placed on the income that the investment property will generate, and only then on the potential capital gains.
The two most common ways for individuals to invest in property for profit, is either through buying a property to let, or buying a property with the intent to renovate and sell it – also known as “flipping”.
Buying a property to let, provides investors with regular monthly income, and allows for the capital growth of the underlying asset value, especially in areas where there is a high demand but low supply of properties, and where there isn’t much land available for new developments.
When you purchase a property with the intention to rent it out your primary focus should be on the investment’s suitability as a source of rental income, rather than its potential to deliver a quick capital gain from a short-term rise in the property market.
There are a number of important factors to consider when buying a property to let. As a landlord, you are responsible for maintenance, repairs, insurance and levies as well as municipal rates and taxes on that property. Depending on the condition of the property when you purchase it, you may also need to undertake costly renovations in order to bring the property up to code, or to make the property more appealing to potential tenants. If the majority, or all of your property investments are financed, you can expect to make regular monthly contributions until such time as the rental income exceeds the bond repayments and other costs. By focusing on the cash flow first, you will ensure that your investment will break even sooner than if you focused exclusively on capital gains.
For those considering “flipping”, you’ll need to make sure that you’ve done your homework. You need to know the average selling price of homes in the area that you want to buy in, and you need to understand what it will cost to complete any potential renovations.
You also need to have as accurate an idea as possible of what the house will sell for when you’ve fixed it up. Your aim is to make a reasonable profit on the sale, so these figures will have an impact on the offer you make on any potential home.
While some investors flip homes on a full-time basis, and have acquired sound knowledge and expertise, others are considering it for the first time, or want to take on projects as an additional source of income over and above their “day job”. For the latter investor, it is a good idea to have a knowledgeable project manager on board to oversee the project, as it can be very time consuming. You’ll want someone who is experienced in construction, and who can make sure all the sub-contractors can complete the relevant tasks on schedule, because the longer it takes to renovate, the longer it takes to go back on the market. That can result in you spending more than you’d bargained for in terms of possible levies, rates and taxes. The longer your property takes to sell, the longer your capital will be tied-up, and unavailable for further investment, or emergencies.
You don’t have to buy a physical property in order to receive returns from a Real Estate investment, however. There is an alternative option that allows you to realise a positive return on investment without the hassle of physical property ownership.
How to invest in real estate without purchasing a physical property
Private mortgage lending is an increasingly popular alternative that gives you the opportunity to invest in property without the need to physically purchase one. Private mortgage lending occurs when a private individual, or organisation, lends money to a borrower, who uses the loan to buy and renovate a residential property, or to undertake a new build.
Suitable as a passive cash-flow generating business, private mortgage lending can generate above-average returns with low investment risk if the correct due diligence is performed. The main reason the investment is low-risk, is because the private mortgage loan is secured by a tangible asset – the physical property that the borrower wishes to purchase – so the investor will consistently retain some value in the event the borrower defaults on the loan.
YDL Property Investments helps investors to expand and diversify their investment portfolio through high-quality, profitable, local and international property investment opportunities. Our private mortgage lending opportunities include short-term loans to vetted borrowers who are wanting to buy and renovate residential properties, or those doing new builds in Atlanta, Georgia, USA. Loans could also include wholesalers, who buy property for the purpose of cleaning it up and on-selling the property for a profit. In selecting short-term loans, our offering reduces the risks and produces better returns over a shorter period.
To learn more about private mortgage lending as an alternative property investment vehicle, read our Insight feature: Private Mortgage Lending Investments can generate meaningful income, or contact us today to arrange a personal consultation, and discover how we can help you expand your investment horizons.
Don’t forget to look out for our December newsletter where we will look at the investment habits South African High Net-Worth Individuals and ask whether they have An Appetite for Investing in Real Estate. We will also look at the property investment climate locally and offshore, and at a simpler way to invest in international property, so you can make an educated decision regarding diversification of your investments.
Some Past Deals
- Private Lending-Wholesale (USA)
- Private Lending-Rehab (USA)
- Flipping (USA)
- Buy-to-Let (USA)
- Speculative (SA)
- Buy-to-Let (SA)