How to Invest In Property

A Guide To Investing In Property

Property is a great addition to any investment portfolio; it is the second best performing asset, after shares. If you are a member of a retirement fund, then up to 20 percent of your retirement savings are likely to be placed into property investments by your insurance group. You can invest in property in many ways, from fairly low-risk to very high-risk investments.

Your property, a holiday home, and even timeshare and fractional ownership are considered lifestyle choices rather than investment choices where financial enrichment is the main goal. Any capital growth on your own home is likely to be cancelled out by maintenance costs and, often, interest payments. Many people do realize a cash return (not necessarily a profit) if they downgrade, say at retirement or when their children leave the nest, and purchase a smaller home.

Buying property for leisure purposes is a lifestyle decision but you can make a profit on a holiday home if you rent it out when you are not using it. Holiday homes are usually only seasonally active and the holiday home market is normally one of the more unstable sectors of the property market and most likely to be the first sector to be affected by a downturn in the economy. Even if you do make a capital gain on your holiday home, it is more than likely to be cancelled out by the costs of upkeep.

Timeshare cannot be considered an investment by any means – it is merely a way to book and pay for holidays in advance.

Making a decision

Once you have overcome your fears of dealing with costs, legal issues and the time it will take to manage and maintain an investment property you should be on your way to an interesting new way of life. It will take effort and there will be hassles but if you have planned for this then your efforts should eventually be rewarded.

Planning your strategy

There are many risks involved, but through understanding them you can manage these risks and effectively eliminate many of them. Investors without a solid strategy are vulnerable to the fluctuations in the property market and are therefore at risk of losing their money.

Finding a property

You should start off by sitting down with a map and deciding upon which areas you would most like to invest in. Check for open tracts of land around any areas that appeal to you and get hold of a council zoning map if necessary to see what the building regulations in the area are. You should find out if vacant land in close proximity to your area of choice has been zoned for industrial use, for instance, as this could eventually affect the resale and rental values of properties in the area. There are companies that can provide you with area sales statistics (for a small fee) that are based on the property transfer history for an area. These are similar to some of the statistics that are used by Realtors for valuing properties.

Applying for finance

Your own bank is often the one that will give you the best deal but they will not always grant you the property fund that you require. This is where mortgage originators offer a valuable service; they are often able to secure a lower interest rate for a purchaser through another bank. On a bond repayment term of 20 years, an interest rate of even 0.5% lower can make a vast difference.

Purchasing property

A good property Conveyancer or Transfer Attorney will guide you through the process of purchasing a property. As the purchaser, you do not have the right to assign an Attorney of your choice; this privilege belongs to the seller. The seller is their client but ultimately it is you as the purchaser who must foot the bill for the necessary transfer costs and in the case of needing a home loan from a bank you will need to pay bond registration costs as well. Before you sign for the purchase a property you will need to know what these costs are as most banks will not readily allow for the inclusion of these costs over and above the required home loan amount. The Realtor assisting you with the purchase of a property should be able to give you these figures. Luckily there is a standard rate that Attorneys must charge for their property Conveyancing services.

Managing your property

Most people believe that straight after the property transfers they will find a tenant, and only be paying the mortgage shortfall. On new developments there is usually a lead time. On existing properties, repairs, maintenance and cleaning often needs to take place before a new tenant can be found. It is wise to budget at least one percent for these costs, and for approximately two months worth of initial tenant voids.

Be sure to choose a reputable Rental Agency to assist you with letting your property. There are Agencies that offer insurance (at an additional monthly cost) against a defaulting tenant so that you are guaranteed to get rental income in for some time while you tackle the process of evicting your tenants. Of course you can find and screen your own tenants to save some monthly fees but you must take care to do this correctly.

Buying to Let

‘Buy to let’ is a favorite way to invest in property, especially when the market is great and interest rates are low. Buying to let is also how many people get into trouble when investing in property and they do not understand the risks. If the risks are taken into account and the investment is properly structured, then this is a secure investment choice.

When you buy to rent, particularly in a new development, it is important to undertake a due diligence investigation of the developer and the development. This includes checking the developer’s credentials and the documents that detail the nature of the development.

The location of the development is an important consideration, not only for resale purposes but also because of the lending policies that banks apply to different areas.

You should also ensure that there is sufficient financing to complete the development.

The main advantages of buy-to-let are:

Your tenant is paying off the property on your behalf.

Losses, at least in the first three years, can be written off against tax.

You can make capital gains on, and receive rental income from, the property.

The main risks of buy-to-let are:

Lack of cash flow. If you need cash urgently, you may not be able to sell the property quickly or you will be forced to sell it for less than you want.

Interest rate hike risk. Purchasers who buy a property when interest rates are low may struggle to repay a loan when interest rates increase. Rental income risk. A tenant may default on rent payments, thus resulting in expensive legal costs to evict a defaulting tenant. Low interest rates can lead to an over-supply of rental property, making it difficult to rent out a property or achieve the rental you anticipated.

Tax risk. Much of the capital gains on a property in nominal terms come from inflation. It is the nominal return that is taken into account when Capital Gains Tax (CGT) is calculated. In other words, you are being taxed on inflation. You must pay tax on any net rental income.

Hassle factor. You are responsible for finding tenants, maintaining the property and ensuring that the tenant does not fall foul of the body corporate’s rules (in the case of sectional title). If you use a letting agent, you can expect to pay the agent at least 10 percent of the rental income.

Property Developments

Residential, commercial and industrial property is developed both for resale on completion and to earn rental. Property development requires a great deal of expertise in property markets and construction. Developing a property enables you to control the design of the end product, which can make it easier to sell. Whether you are planning to build a small block of apartments or develop a golf course, the risks are significant. They include:

Increases in interest rates or the withdrawal of financing. The recent global recession was led by a property market collapse in which mainly American banks had given home-buyers very easy access to home loans. When the defaults started, the banks pulled back on all their lending. Property developers faced serious challenges and many went bankrupt. Higher interest rates also normally result in a slowdown in sales, which means that you may have to hold onto a property for longer than you anticipated. So, although interest rates may have been low when you embarked on a property development, you could still be financing the project three or four years down the line.

Increases in building costs. Remember the adage that when building you should plan on its costing twice as much and taking twice as long as you anticipated. Not planning for this may cause you to either borrow more from a bank (that will charge you more interest) or sell an unfinished project at a loss.

A downturn in the property market, resulting in lower property values and/or higher holding costs until the property is sold. You need to understand what drives property markets so that you time your development to be completed when markets are booming. This means, for example, that you need to buy undeveloped land at a low point in the property price cycle.

Disputes with building and other contractors. Conflict can result in the project falling behind schedule and in high legal costs and further delays in bringing your property to market. You need to know exactly with whom you are dealing and ensure you have proper contracts in place.

Legal and regulatory issues. These can range from a change in the legislative environment that may affect the property cycle – such as the introduction of, or an increase in, CGT, to changes in town planning regulations. The increasing attention to “green” issues and the requirement that an environmental impact study be undertaken before a development will be approved have upset many a developer’s plans. If you do not have a sound understanding of property law, you must employ a lawyer who does.

Should you expect delays when it comes to obtaining approval for your plans then note that Property Developers around the country are becoming increasingly frustrated by the lengthy delays in granting approval for plans.

Unexpected structural defects can result in a substantial reduction in profit margins.

If, despite the above risks, you still expect to make a good return on a property development, you can proceed knowing that even in a worst-case scenario, where the bottom falls out of the market, you will not lose money.

Collective Investment Schemes

The most hassle-free way to invest in property is through a pooled, or collective, investment. This means that you and numerous other people club together and buy a portfolio of properties, thereby reducing the risk should something go wrong with any one property.

The advantages of pooled investments include:

Your risks are reduced, because you are investing in a number (a pool) of properties.

You avoid the hassle of dealing with tenants and collecting the rental. Professional property management companies attend to all aspects of your investment, from maintenance to rent collection.

Your investment is liquid in most cases; you can invest and disinvest at will.

They enable people who do not have the significant amounts of money required for direct property ownership to invest in the property market.

On a cautionary note, property syndication is a pooled investment and collective investments come in many different forms with different levels of regulation and risk.

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