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Property Strategies for profitability

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Property Strategies for profitability

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I am biased about property

Property investment profitability – What a mouth full! I find many people on the interwebs and Twittersphere is vehemently against property investment. The simple reason for this is people favour the things that they know – this is cognitive dissonance at play here.

Even so, many people will tell you that property is not profitable – and in some cases this is true. There are also many stocks that are not profitable as well! Here are some of the myths:

Property profitability myths

  • Property cannot give you the returns stocks can
    • Well, then my calculations are wrong and I should just die
  • When you calculate the cost of repairs, maintenance and other costs it becomes unprofitable
    • I include these in my calculations and so should you
  • You will need to pay money from your own pocket monthly as the rent doesn’t cover the mortgage
    • Well, sometimes. It depends on the property you are investing in.
  • Rent and property value will not increase by inflation
    • This is biased, as many many stocks do not increase with inflation either – Steinhoff anyone?

Choosing your investment strategy

As with all investments, you need to have a strategy and see it through. If you change direction the whole time, you will end up with nothing in the end. Property is the same – don’t fail to plan!

Property type strategy: krugerrand or cashflow properties

All property is equal – but some are more equal than others. 

I personally believe there’s two types of property you can invest in – cashflow and krugerrand properties and a good property investment strategy has a bit of both. Here’s a quick summary of these:

Krugerrand properties

  • Upper class suburbs
  • Purchase price is expensive – you get what you pay for
  • Small and large properties, but the price is steep per square meter
  • Low rent to purchase price ratio
  • A down payment or a large monthly shortfall is often required
  • Value often increases more than rental income

Cashflow properties

  • Often situated in below middle class locations
  • Often the price is competitive or cheap compared to other properties with similar specs
  • Small properties, such as flats, sectional title units and low cost housing
  • High rent to purchase price ratio
  • A small monthly shortfall is payable
  • Rent often increases more than property value

To give an illustration of the following, I normally compare my personal properties on a rent to purchase price ratio: If I buy a place for R 400 000, I expect a minimum rent of R 4 000 per month (a 1% rental factor). Often I would actually expect a rent of more than this – as I would prefer my rent to cover my bond and all monthly fees. This is an example of a cash flow property.

I could also buy a Krugerrand property. I could spend R 1 000 000 on a place that is a bit more upper class, but my rent is only R 8 000 (a 0.8 % rental factor), and my levies and taxes have been deducted yet.

Term strategy: rental properties or fix and flog

This question is rooted in the argument about what is more important – cash flow of capital gain. It’s also very much entwined to your personality and your physical abilities.

Passive income

  • You get paid regularly for not working – e.g. monthly rent for someone living in your flat
  • Low / No involvement with returns, without affecting your capital investment – think dividends and rent
  • Buy to keep – you are not planning on selling anytime soon, thus your taxes are lower

Capital gain

  • You do a deal to get a cash injection – e.g. buy, fix and flog a property
  • High / moderate  involvement to manage your invesment until you flip it
  • Your end goal is to sell your investment and use the profits for something else.

Many people will tell you in old age you need income – which is true, and many people settle for passive income, rather than drawing money from their living annuities. Well, the fact is you will need money then, and I would opt for passive income! But right now, it would be cool to have both. The cycle often works as follows: make money through capital gain, and invest this into assets that will give you passive income. 

I love passive income, but I do realise that your own money only will not make you retire early – unless you sell both your kidneys, heart and lungs… 

This is an excerpt from Frugal Local. See the full article here. Reposted with permission.

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Carl Barnard

Hey, I am frugal... I love talking about property and money. Some interesting facts about me: I drink too much coffee. I have walked the Camino de Santiago twice. I have the most awesome wife. I am a software developer by day.

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