MAIN IMAGE: Yolanda Cornelius of Just Property Zululand and Dolphin Coast; Carl Coetzee, CEO of BetterBond; Shaun du Bois, Just Property Choice
Staff Writer
“Property investment is still the most reliable way to generate income over the long term,” is the advice from Yolanda Cornelius of Just Property Zululand and Dolphin Coast, to other property practitioners.
“If you are an investor, it is best to invest in a property that will produce rental income year-round. Just make sure you understand all the costs associated with legal fees and are prepared for unexpected costs,” she says.
This is said in the light of South Africa’s repo rate which is currently 5.5%, while “aggressive hikes can be expected during the rest of the year” according to PayProp’s latest Rental Index Report.
“The decision to hike the repo rate by 0.75% recently, while uncomfortable, will help guide inflation back towards the midpoint – between 3% and 6% – of the target band so that we can expect to see lower interest rates in the future,” predicts Carl Coetzee, CEO of BetterBond.
“Of course, if you buy the wrong type of property at the wrong time or in the wrong area, it would be a bad investment, but with the right advice, even inexperienced buyers can get it right, says Shaun du Bois, Just Property Choice: “The wealth that property investing can generate over time is phenomenal.”
Fixing interest rates
Given the broad market opinion that interest rates will keep climbing and that South Africa is entering a prolonged period of inflation, could you use a long-term bond, fixed at the current rates as a hedge against inflation?
While that is being suggested in some economies, like the US, it’s not necessarily a good idea for South Africans. Those who apply for a fixed-rate bond should be aware of the constraints.
“The value of your property depends on market growth, so there isn’t a simple answer when it comes to evaluating the benefits of a fixed interest rate versus a variable interest rate that fluctuates in line with the repo rate,” says Coetzee. “Each buyer’s financial situation and circumstances are unique, and it depends on the state of the market and house price inflation.”
When applying for a home loan, it is by default based on a variable interest rate, he explains. Only once the bond is registered can one apply for a fixed interest rate within a strict time limit attached before the offer lapses. The fixed-rate offer on a bond is usually considerably higher than the variable rate as it poses more of a risk to the bank.
“It’s also worth remembering that fixed interest rates are set for up to a maximum of five years. That means that on a longer-term loan you would need to renegotiate the terms after five years, if not sooner, and you could very well find that the new terms are less favourable than they were before,” he warns.
How long should one hold on to property?
Knowing when to sell a property can be a difficult decision for any investor. “There’s an old saying: Don’t wait to buy real estate; buy real estate and wait,” says Du Bois. “Property should seldom be sold. If you purchase wisely, there should be little reason ever to sell.”
Cornelius agrees. “Try to hold onto a property for at least four to five years. This time frame is sufficient to show healthy appreciation – the level of appreciation will help you evaluate the property’s future potential performance.”
One investment that has proven to outperform inflation in the South African property market is cleverly selected buy-to-let property, says Cornelius. “Firstly, while experiencing short-term fluctuations, property price growth continues to keep pace with inflation over the long-term. In fact, it is widely recognised that inflation boosts physical asset prices like gold, silver, oil, and property.
“With recent trends, I would be leaning more towards affordable sectional title units than commercial,” says Du Bois. “Flipping” can be lucrative if you can purchase a residential house that you can convert to commercial zoning; otherwise, he sees little opportunity, “though some individuals have succeeded”, he concedes.
To avoid over-capitalising a primary residence and not being able to reap a return on your investment, Du Bois suggests keeping an eye on recent sale prices in your area. “This should give you an idea of how much you should spend on upgrades so that one day when you sell, your house offers value and a good sale price. A healthy mix of optimising for a good lifestyle that suits your family’s needs, selective upgrading and maintaining the property is the best mix.”
Investor advice
“Think about where you want to be in 10-, 20- and 30-years’ time, and define your objectives. Review your current financial circumstances, anticipated changes, and future goals,” says Cornelius. “Sound financial advice and planning will help you determine your short- and long-term financial goals. Your investment strategy should then help you achieve those goals over time, based on your tolerance for investment risk.”
Du Bois believes one should have diversity in one’s portfolio but retain property as the major investment.
