Offshore real estate remains a solid investment for high net wealth South African investors. Here’s how to build that investment into a well performing portfolio.
First things first: as with any investment, buying property as an investment vehicle requires a plan. You may consider buy-to-rent an easy option – after all, what could be more attractive than the prospect of a passive income – but the reality is that there are several factors to be considered. These include ensuring that you aren’t hit hard with a hefty tax bill, and that estate, life and death costs are kept as low as possible. You also need to make sure that mechanisms are in place to guard other existing assets against risk and, of course, you’ll want to find a way that makes your financial potential work best for you. You also need to take stock of the fact that this is a long-term enterprise: your first property is just the start of a strategy that should be adjusted to accommodate five- and 10-year goals.
It’s said that the very first property in your portfolio is the most important, an observation that makes sense when you consider that any poor decisions now affect your ability to expand the portfolio later.
One of the most pressing decisions for any property investor is where to buy. Common wisdom holds that buying off plan is always the best bet. Typically purchased in the construction part of the building process, buying off-plan is a great way for investors to purchase property at a discounted price. However, when your goals centre around buying to rent, you may want to secure a property that’s ready for a tenant to move in straight away – otherwise, you could find yourself waiting for several months (if not a full year) before the construction is complete.
It’s best to start small, notes Scott Irving, GM of Carrick Property: there are several suburbs that have caught the attention of people who have just started earning enough to move out of home, and these are a good place to start. Research which nodes are showing year-on-year increases in house prices – look at past trends and investigate any movement in the area. Is there a lot of development, for example? This may not necessarily be related to residential property (which would indicate the area’s desirability as an address); the establishment of, say, restaurants in the vicinity may show that the area has gained a spot on the radar and is attracting interest, while regeneration projects or construction of a shopping centre or office block may herald an influx of residents looking for a home close to the workplace.
Choose a development where you may be able to add value through renovations, for example, when your budget allows.
A cautionary (although obvious) observation: it may be easy to imagine that your income will absorb any additional costs that aren’t quite covered by the tenants’ rental, but sooner or later you may be tripped up by this. You should be able to cover void periods and repairs as well as levies and taxes without incurring any strain.
Time to grow
Once you’re comfortably reaping the rewards of the first investment, you may wish to explore the possibility of purchasing a second. Of course, you’ll have to give your investment sufficient time to increase in value, so that you can use this to offset your second bond.
At this stage, consider looking into other options besides the residential buy-to-rent market: maybe it’s time to look at commercial or office space. You may even investigate investing in a real estate exchange traded fund or real estate mutual fund. Whatever route you take, it’s vital to keep track of each property, who is living there, and any refurbishments or repairs needed, which is where tools like real estate investment spreadsheets come in handy.