Property still stands the test of time

There’s a myriad of options when it comes to investing our money, but property has remained an interesting option that has stood the test of time.

So says Gareth Bailey, Pam Golding Properties area principal for Durban Coastal, who adds: “Property is relatively easy to understand. It is also a forced saving as owners can’t easily shirk bond repayments by, for example, deciding to rather go on an overseas holiday.

“The same is not true for many other cash-based or flexible contribution investments. It’s also harder to splurge profits out of a property investment as it requires refinancing or selling the property.

“From a cash flow point of view, the monthly outgoings are mostly fixed from the time of purchase since the bond instalment, barring major interest rate changes, is mostly stable,” says Bailey.

“By contrast, rental income escalates consistently over time. This annual escalation ranges from 5% in a weaker market to 10% during the good times. Most importantly, rental income should keep going up while bond instalments should remain constant, creating an increasingly positive cash flow stream over time.”

Bailey says for many people, buying their first investment property will require them to follow the first two principles: “pay yourself first” and to “live below your means”.

Any deposit saved will be richly rewarded as the bank, subject to credit approval, will pay three or four times as much toward purchasing the property in the form of a mortgage bond.

“Property investment offers two types of return – capital, which is derived from property price growth, and income,” Bailey says. “When choosing a property, it is important to decide on which type of return you are seeking to prioritise.

“In my view, prioritising capital growth makes the most sense as a higher rental income means more trading profit which will be taxed annually, whereas capital growth is not taxed until the property is sold.”