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Property mini-series part 1: Pros and cons of real estate investing

March 4, 2024
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FinMeUp
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FinMeUp

In this mini-series, Ill discuss the ins and outs of real estate investment.


In this mini-series, Ill discuss the ins and outs of real estate investment. This series is the culmination of knowledge gained from university and CFA modules, two books on real estate investment in South Africa, online research, and personal experience through the purchase of two properties in 2020 and 2021 respectively.  Ill be posting regularly in the next few weeks, documenting all I know about this asset class. 

The series will be split into the following articles: 

  1. The pros of real estate investment
  2. The cons of real estate investment
  3. Looking for a property: Location
  4. Looking for a property: All other variables
  5. Investment structure
  6. Financing
  7. All costs involved
  8. Owner responsibilities
  9. Property Law working for and against you
  10. REIT vs physical purchase

Here we go: the pros of investing in real estate:

Control over investment

A property investor has far more control over their investment than in any other asset class. By investing in stocks, for example, the investor puts his/her faith in the management of a company to grow the business and maximize the value of its shareholders. With real estate, one can participate in every aspect of the investment: Location, type of property, financing, management, improvements, and selling. 

Other peoples money

We all know the phrase: You have to have money to make money. Of course, this is true for almost all investments as the growth of your investment is subject to how much money you put in. When it comes to property, however, all you need is a payslip. You essentially use other peoples money to buy property via a loan. ABSA will never grant you a loan to buy stocks, even if you want to invest in ABSA itself! But for property, they will gladly assist. 

Value appreciation

The value of any asset depends largely on the interaction between demand and supply. Real estate is super easy to understand: firstly, people need a roof over their heads, and secondly, the amount of people in the world is increasing. Of course, this assumption is area-specific, but on average, property values appreciate over time. 

Inflation hedge

Inflation cuts into the growth of all investments. Property, however, is an amazing shield against inflation both in terms of capital growth and rental income. The value of the property increases over time mainly due to increasing demand (as discussed above) and the type of asset it is - real estate is often viewed as a relatively safe investment vehicle, which means people invest in it during periods of higher inflation and/or economic uncertainty. The rental income associated with a property simply increases every year, at the same level (or even higher) than inflation.   

Steady cash flows

When leasing a property, one can with reasonable certainty expect to receive rental income at the end of every month. It is super important to get the right tenants for your property (a process which we will discuss in later chapters). The point is that leasing is a contractual obligation between the lessee and the lessor, which means that future cash flows should be locked in.

Depreciation Tax Shield

Depreciation is the decrease in the value of an asset over time due to wear and tear. Depreciation is a non-cash outflow, meaning that it is an expense that doesnt cost you anything - it just happens over time. This reduces your taxable income, thereby shielding you from a portion of the taxes that would otherwise be due. 

As discussed earlier, property values tend to increase in value over time, but depreciation accounts for the loss in value due to usage and deterioration. Therefore, it is important to maintain and improve your property over time to keep it in its best possible shape. 


Whats next?

In the next article, Ill discuss the cons of real estate investing. This way, you can know exactly what you are getting yourself into when investing in this asset class. Personally, I believe the pros outweigh the cons. BUT, every scenario is unique and therefore it is vital that you educate yourself before getting your hands dirty. Even if property investment is not for you, learning about it will make you a better and more informed investor in the long run. Stick with me!

 

 


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