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:
- 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
- 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.
- 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
- 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…