Build a prop­erty port­fo­lio as a young pro­fes­sional

George Herald - Private Property - - Property News -

As a long-term in­vest­ment, it makes sense to start build­ing a prop­erty port­fo­lio as early in life as pos­si­ble, but with prices as high as they are in many parts of South Africa, get­ting that foot in the door can be a daunt­ing prospect. “It’s a myth that you have to be old or rich to start a prop­erty in­vest­ment port­fo­lio,” says Bill Raw­son, chair­man of the Raw­son Prop­erty Group. Hav­ing cap­i­tal avail­able cer­tainly makes things sim­pler, but there are plenty of ways de­ter­mined young pro­fes­sion­als can kick off a prop­erty port­fo­lio from a rel­a­tively early age.

Af­ford­abil­ity

One of the more com­mon ways to breach the af­ford­abil­ity bar­rier for first-time pur­chasers, says Raw­son, is to team up with friends or fam­ily and make a joint pur­chase. Few young peo­ple can af­ford the full bond re­pay­ments on an in­vest­ment prop­erty in ad­di­tion to their ex­ist­ing ex­penses, but pay­ing half or a third of that bond might be man­age­able - par­tic­u­larly if the prop­erty can gen­er­ate de­cent rental in­come.

Choose well

Choos­ing that first in­vest­ment prop­erty wisely is vi­tal to the suc­cess of your fu­ture port­fo­lio, how­ever, re­gard­less of whether you’re shar­ing the ex­pense with co-in­vestors.

A solid first in­vest­ment forms the foun­da­tion - and of­ten fi­nanc­ing - for sub­se­quent pur­chases. That makes it ex­tremely im­por­tant to do your re­search well be­fore set­tling on a prop­erty.

The good news is that sta­tis­tics re­leased by FNB show that smaller prop­er­ties have shown con­sis­tently higher ap­pre­ci­a­tion than their medium and large coun­ter­parts since 2010. Sec­tional ti­tle prop­er­ties also con­tinue to out­per­form free­hold homes, putting paid to any ru­mours that prof­itable in­vest­ment prop­er­ties have to cost a for­tune.

“One and twobed­room apart­ments make ex­cel­lent starter in­vest­ments, pro­vided you choose your area care­fully and do a thor­ough check into the de­vel­op­ment’s man­age­ment his­tory,” says Raw­son. Aim for a neigh­bour­hood that is ei­ther just start­ing to show prom­ise, or buy into an ex­ist­ing rental hotspot. The former of­fers po­ten­tially higher cap­i­tal ap­pre­ci­a­tion, but the lat­ter might pro­vide bet­ter im­me­di­ate rental re­turns.

Add value

When it comes to ex­pand­ing an in­vest­ment port­fo­lio how­ever, rental re­turns sel­dom pro­vide suf­fi­cient cap­i­tal on their own.

Rather, con­cen­trate on us­ing rental in­come to pay off your bond and en­hance your prop­erty’s value if pos­si­ble.

It’s al­ways a good idea to put ex­tra cash into your bond to de­crease the over­all cost of your fi­nanc­ing, but if you’re look­ing to ex­pand your port­fo­lio quickly, con­sider adding value to your prop­erty as well.

Value can be added ei­ther di­rectly, through ren­o­va­tions and im­prove­ments, or hap­pen or­gan­i­cally as a re­sult of pos­i­tive mar­ket trends and ap­pre­ci­a­tion over time.

Ei­ther way, hav­ing a prop­erty that is worth more than when you orig­i­nally mort­gaged it opens the door for a new po­ten­tial source of fi­nance: a sec­ond bond.

It’s a myth that you have to be old or rich to start a prop­erty in­vest­ment port­fo­lio.

Sec­ond bond

“A sec­ond bond al­lows you to bor­row the dif­fer­ence between the price of your prop­erty at date of pur­chase and its cur­rent value - at the dis­cre­tion of your bank, of course,” says Raw­son. “For ex­am­ple, if you bought your house for R1-mil­lion and it’s now worth R1,5-mil­lion, you could po­ten­tially bor­row an­other R500k. That could go a long way to­wards fi­nanc­ing the pur­chase of a sec­ond prop­erty, us­ing your first prop­erty as lowrisk col­lat­eral.” This kind of cross­sub­si­dis­ing, is vi­tal to grow­ing a prop­erty port­fo­lio, and be­comes eas­ier as your in­vest­ments ma­ture.

“The first few pur­chases are al­ways the most dif­fi­cult, par­tic­u­larly as a young per­son at the be­gin­ning of your ca­reer tra­jec­tory. The trick is to start small, but start strong, and don’t be afraid to ask for ad­vice.

“The po­ten­tial for growth is sub­stan­tial, but there is risk in­volved as well and you need to make sure you’re in­formed of all the pos­si­bil­i­ties.”

Add value through ren­o­va­tions and im­prove­ments.

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