Pointers on growing a prime property portfolio
Against a background of falling equity markets and the weak rand, many investors are considering the appeal of prime sectors of the Western Cape residential market in building a property portfolio. Aiming for capital growth, accompanied by an income stream from letting, they are attracted by the region’s track record as a relatively safe property haven.
Some people may start a property portfolio by keeping their original modest apartment when moving to a bigger home, while others may be considering adding to already substantial assets. But as with all investments, it is vital to do through research on earnings potential and have a well-thought-out strategy, says Pam Golding Properties (Western Cape) MD Laurie Wener.
Considerations include how you are going to fund your property, how much risk you want to take, understanding what you want to achieve with your investment, and getting to know your tenant profile. Insights from experienced, well-respected property professionals can be invaluable.
The best an investor can hope for in terms of South African rental returns is from 8% down to 2% for long-term rentals (12 months and more), says Wener. Generally, the higher the value of the property, the lower the rental return. Most investors view rental returns as a secondary benefit to the capital returns.
“Smaller, lower-priced properties will yield a higher rate of rental return. Large properties yield lower rates of rental return, but can yield large capital growth in the medium to long term (six years plus).”
Smaller rental properties that are constantly in demand include one- and two-bedroomed Atlantic Seaboard apartments, in areas such as Green Point and Mouille Point, and the CBD. Young professionals want proximity to work, the V&A Waterfront, clubs and restaurants and the Green Point urban park.
Prime properties in areas such as Fresnaye, Bantry Bay and Clifton are considered the recession-proof jewels in the capital growth crown. For example, a Bakoven bungalow for R29 million and a four-bedroom Clifton apartment for R36 million were among the half a billion rands worth of agreements of sale written by Pam Golding Properties in the Atlantic Seaboard and the Cape Town City Bowl area during November and December alone.
Typically, seasonal or holiday homes may yield excellent rental returns during the peak summer season. However these can dwindle to very little in low season; and agents’ fees on short term rentals are about double those on long term rentals.
It is vital to put in the groundwork and study trends in the areas before you buy to rent, understanding the best locations and nuances of the various suburbs. Determine your tenant profile and gauge demand.
Your market may be young professionals wanting “yuppie pads” in the central city; families needing spacious accommodation close to schools, in areas such as Rondebosch and Newlands in Cape Town; or those scaling down and wanting the convenience of an apartment on the Atlantic Seaboard while still maintaining a high standard of living. In all areas, security comes at a premium.
Wener advises mortgaging the property to no more than 40%-50% of the purchase price (particularly in a rising interest rate environment) or you might find yourself having to subsidise your investment on a monthly basis. Ensure that the bond repayments, levies and rates are covered by the rent with a little over for repairs, maintenance, interest rate increases and possible short periods of vacancy at the end of lease periods. SARS requires any surplus to be added to your taxable income.
“Speculation, buying for quick turnaround at a profit and/or in emerging areas, is exciting. But understand the increased risks and be sure you can hold out if you need extra time before selling. While Western Cape property is an excellent investment in the medium to long term, keep in mind it is not always a quick asset to liquidate; and this is associated with costs.
“You will have paid transfer and perhaps bond costs when buying and you will have to pay agents’ brokerage and inspection costs and bond cancellation, if applicable, when selling. So take this into account when calculating your potential profit on resale. It could be around 10% to 12% over the price you paid before you are into profit, which will ultimately attract capital gains tax.”
Purchasers must keep accounts of all capital improvements to a property as these can be added to your capital cost and will decrease the capital gains tax due. (This does not include bills for maintenance or repairs, but costs incurred in improving or enhancing the value of the asset.)
It is vital that an investor has sufficient disposable income to meet family needs first – “some say start your portfolio after the roof over your head is fully paid for and be sure that you can hold the property during the inevitable down cycles.
“Generally speaking, your portfolio should ultimately be spread in accordance with your financial situation and your personal appetite for risk. While it is good to have a spread in terms of suburbs and property type, be sure to invest in well-established areas with good infrastructure, high demand and a track record of trends.
“Taking these factors into account will you grow a property portfolio of sound investments whose overall performance should be cushioned even in challenging market conditions.”