Laurie Wener is a Director at Pam Golding Properties (Residential) and the Area Manager of the Atlantic Seaboard offices, Cape Town. INTRODUCTION Understanding the risks and the rewards in property investment is the difference between profit and loss. There is a common perception that property investment means buying a residential property and living in it. Although this is one way to create a long-term investment, there are a number of ways to become involved in property investment and many types of investor properties on the market.

Knowing who to go to and how to invest smartly is paramount to success in this highly competitive market. In this newsletter, we talk to investment expert Laurie Wener about residential investor property.

WHAT DOES "INVESTOR PROPERTY" MEAN?

This relates to any property that has the potential to yield an acceptable rental return and/or capital growth to the purchaser.

Any property purchased by an individual, for the purposes of permanent or temporary use, may be purchased with an investment purpose in mind, in respect of capital growth.

WHAT ARE THE AVENUES TO INVEST IN?

Lettable Units

The smaller type of investor who uses property investment as a secondary means of accumulating wealth, may typically purchase smaller lettable units that tend to yield higher rental returns than larger more expensive properties, spread the risk and can usually be liquidated more rapidly.

Purchasing units off-plan is popular as investors can secure a purchase with a 10% cash deposit and pay the balance one to three years later when the building is complete and the growth in the market has yielded a good profit even before they take transfer. Capital profits of 20% to 30% from date of purchase to transfer are not infrequent.

The longer the time between purchase and completion/transfer, the lower the risk, provided the market remains bullish. Many purchasers sell on, or even prior to, transfer and take their profit, whereas others may elect to hold the investment, yielding moderate rental returns or even subsidising mortgages, confident that the medium to long-term capital growth will make it worthwhile.

Usually these off-plan sales include VAT in the purchase price, and the purchaser does not have to find the cash to pay transfer duty.

Speculation vs Investment

Short-term speculation can yield good profit quickly when the property market is bullish. For punters who crave the excitement of higher risk for quick reward, this is great, but a word of warning: be sure that if market conditions become bearish that you can afford to hold onto the property for the time it takes to recover.

Medium to long-term investment, from around three years on, will substantially lower the risk, but be sure you can afford to “bank” your investment without impoverishing yourself.

As long-term rental returns range between 4% and 6% and mortgage interest rates are around 11%, you would need no greater than a 50% mortgage on an investment property if you did not wish to subsidise on a regular basis.

Bear in mind there are levies and/or rates to pay, interior maintenance and rental fees if you use a professional company to source a tenant and/or administer the property. There is also the possibility, for whatever reason, of finding yourself without a tenant for a month or so in the year.

Short-term furnished and equipped properties may yield higher rental returns, depending on where they are situated, and they tend to be seasonal. They attract much higher agency fees and maintenance costs, but can be lucrative.

City Residential Re-developments

The worldwide trend for the re-development of commercial buildings in cities to residential apartments, offers excellent opportunities for mixed usage, like working and/or living in the same building, either as an owner or as a tenant.

These buildings generally retain commercial zoning, which permits this, although Body Corporate and House Rules would specifically prohibit any activities that compromised the use and enjoyment of residents.

Bone fide business activity would permit certain tax relief in respect of mortgage repayments and rental. Consult your accountant or SARS for relevant advice.

Contact: Laurie Wener: lwener@pamgolding.co.za