Investing in Property
If you increase your bond repayment by only 10% and pay a 10% deposit when you buy a property, you will settle your bond in just more than 10 years instead of 20, repay more capital than interest after year 5 instead of year 15, and save 60% on interest payments! This way you can settle your bond, buy a second property, receive rental income and repay the bond after just a few years ( as short as 4 years) if you include part of the rental income to your bond repayment.
It might make sense to rent not buy your primary residence and first buy a residential property to let out.
There are two ways of investing in Property, Indirect or Direct.
You can invest in property indirectly through a ‘pooled’ or ‘collective’ investment scheme, like Preference shares, ordinary shares, or units in a Collective Investment Scheme in Property, listed on an exchange or just a normal Unit Trust. You can invest in funds like the Coronation Property Equity Fund, Property Index Tracker SAPY etc. You also have an option of buying shares in a Property Investment company like Growthpoint, listed on the JSE.
If you are investing in Property with your pension funds, Retirement annuities etc, you can invest up to 25% in property according to Regulation 28 of the Pension Funds act.
Buying your home, residential or commercial property for residing purposes or to let out is a way of investing directly in property. Over time the value of property normally rises but not always in a fixed path. Most asset classes fluctuate in values and property is no different, but the general trend is upwards as the second best performing asset class over a longer period. This volatility in values makes it essential to regard residential or commercial property, the same as shares, as a longer term investment. Your planned holding period should be for at least five to ten years (the longer the better). This will smooth out your returns and help to maximise capital growth. It might be best to keep a property investment for even longer, depending on the location.
The most appealing aspect of investing in property is the ability to earn a regular stream of rental income. Unlike other investments like shares or a term deposit, you can expect to receive monthly rent rather than having to wait for a longer period to see some cash inflow. The rental income helps with your personal cash flow, and even better, it is fixed for the term of the lease. Residential tenants typically sign leases for terms of 12 months and more, so you know how much rent you will receive and this makes personal budgeting easier. Rental income normally increases with at least inflation as well.
The one mistake investors normally make is buying a property and selling it after 1-6 years. Remember that in the first 10 years of bond repayments, 70% is interest and only 30% capital repayment. Normally you either make a loss or brake even if you sell at a decent price, hence the advice of renting your primary property and buying a property to let.