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Sensible property investing for beginners

April 16, 2024
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Finsesh
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Finsesh

Know your numbers to avoid the rush of emotions when buying your first investment property.

Investing in your first property is a rush. A rush of emotions, the excitement is only curbed by fear. Fear for so many things that could go wrong. But what if they go right? 

Park your fears aside, as this article will assist you in knowing the numbers before you take the plunge!

Everyone has an opinion about property investing. You have the naysayers, dooming property and telling you of their worse experiences. On the other hand, many people have become financially independent by investing in property and understand the risk better for doing so. 

A great tip is to only take advice from people that are in the property game, if not you are probably talking to a naysayer and letting them influence your thinking.

The hardest part about property investing is fear. Fear of the wrong property, bad tenants, management, or taxes. Mostly these fears only exist in our heads and seem small once you add a few properties under your belt. Diligent research and getting your numbers for your property's income and expenses correct reduces your margin for failure substantially.

Today as the new year brings with it many goals, this article is a guideline for sensible property investing for beginners and those that want to face their fears and make their first property investment.

 

Know your investment strategy before you purchase your first investment property 

Knowing what you are getting yourself into is important. The last thing you want to do is buy a property, be cash flow negative, place your family under financial pressure, and have to sell at a loss, all due to bad planning. This won't be you! Let's talk strategy: 

Two main strategies when property investing

There are many more property strategies, but these two are by far the most popular. One aims to generate income while the other generates short-term capital gains. The two strategies are, Buy to let and buy to flip. 

Buy to Let: Property investing to let the property for income. The aim is to balance your deposit and cost to produce positive cash flow as soon as possible. This can be done by buying at a good price, managing the costs, and using a bigger deposit to ensure positive cash flow.

This is a great way to achieve financial independence over time. 

Properties can be bought plot and plan for sec 13 Sex benefits or bought, refurbished, and then refinanced for the next property. This latter strategy is called the BRRR method. 

Buy to Flip: Property investing to sell the investment property in the short term. The aim is to buy at the right price, as the profit is in the buying price. Balancing the cost of acquiring the property, renovating, and running costs will have to be taken into account. 

This is a great way to create short-term cash flow to fund your next property or reinvest in buy-to-let properties.

Once you know your plan for property investing your research will start with the various elements of the investment strategy. Below we will look at the various costs involved for each strategy. 

 

Know the costs when purchasing your first investment property

Knowing the cost involved when purchasing a property is vital for your mental and financial health. Buying a cash-flow negative property with no end in sight for losses does not make for easy sleeping. Over capitalising and selling for a loss is bad for the ego and your pockets. So let's ensure you get this part right.

Let's talk about the cost involved per strategy mentioned above for you to avoid these pitfalls.

Buy to let

Income: 

Research the area where you are looking to invest and speak to rental agents to find an estimation for the rental of your potential property investment. This will help you determine your income and the maximum cost you can incur to break even or make a profit.

The following costs are involved with buy-to-let investments.

Initial costs: 

Bond registration and property transfer: These two are the major costs involved when purchasing a property, must be because lawyers are involved. Using a calculator such as this one from BetterBond will give you accurate results for these costs.

Transfer duty: This is not the same as transfer costs. Transfer duty is a tax levied by SARS depending on the value of the property. This is the latest transfer duty table.

Bank initiation: This is a bond activation fee from your bank. This fee differs between institutions and is generally included in your bond amount. At the end of the day, you're still paying for it. 

Admin: The admin fees are included in the calculation from the BetterBond calculator mentioned above. Mostly small amounts that add up, such as post, petties, and deed office fees.

Agent fees: This is a fee paid to an estate agent for connecting the buyer and the seller. This fee is negotiable when you list a property but not when you are a buyer. 

Deposit: You will need a deposit for the difference between the property price and the bond amount. Using a deposit will help balance your monthly cash flow. Your deposit needed can be estimated after you take your income and expenses into account. 

Ongoing costs:

Bond: Your monthly bond cost can be estimated using this bond calculator. Enter your bond details and your deposit amount to see your monthly repayment. Manage your monthly repayment with your deposit to ensure a positive cash flow for your property.  

Rates: Rates paid to the municipality for services rendered of the property such as sewage and refuse collection. It's based on the value of the property. Rates amount can be requested before investing.

Levies: This is paid to the body corporate (sectional title) or municipality depending on the type of property. Levies paid to body corporates include maintenance of the exterior of the property. Levies can also be requested before investing. 

Maintenance: These costs are unplanned maintenance for the property. The rule of thumb is 1% of the value of the property per year as a budget for maintenance. Frugal Local suggests up to 3 months of rent available on hand for these unexpected maintenance costs. 

Agent: This fee is paid to an estate agent for finding, placing, and doing the management of the tenant on your behalf. 

Insurance: You might need life cover for your bond exposure from your bank. Insurance can also include property insurance, which covers the building or even the household contents. Depending on what you insure the costs will differ. Ask a broker to do a quote or give you a calculated guess. 

Buy to flip

Income: 

Rental agents will know your potential investment area well, so have a conversation with a few agents in the area to estimate a selling price. You can also use tools such as Lightstone properties to draw a report on the property and see what similar properties are selling for. 

Initial costs: 

The initial costs for buying a buy-to-flip property will be the same as the initial cost for buying to let. The ongoing cost below will differ, so scroll back up if you missed something under initial costs and read further.  

Ongoing costs: 

Once the property is purchased the ongoing costs will differ between the two properties as the property investment strategy differs. 

Bond costs: Your monthly bond cost can be estimated using this bond calculator. Enter your bond details and your deposit amount to see your monthly repayment. If you purchased the property with a bond, then your monthly payment will be deducted during the renovation and sales process. The aim is to speed up renovations to reduce bond costs. 

Renovation: Flipping involves some maintenance and renovation costs. You want to keep to mostly cosmetic work to reduce costs and time to complete the sales process.  

Agent: Flipping involves selling the property after maintenance and renovations are complete. This would involve another round of agent fees if you choose to use their services. Ensure you negotiate on their fees and compare agencies. 

Sales costs: Other sales costs include compliance certificates (electric, gas, beetle, plumbing)

When obtaining a rates clearance certificate the municipality may require between 2 and 6 months of rates to ensure they are funded while the sale is in process. All excess funds will be refunded. Bond cancelation fees could be payable if the bank is not notified timeously of the cancelation of the bond.

 

All about the numbers

Researching and knowing your numbers goes a long way in determining your profit. Sure things can cost a little more when renovating, or your income could be slightly less than expected, but if your research and numbers were calculated correctly with small buffers built in for margin, you will come close to your profit expectation. 

Gather all the income and cost expectations from the above and test some properties as an example for yourself. Not all property numbers work, just move on to the next one. Until you find your gem.

 

Let's look at some of the important numbers. 

How much can you afford? Affordability will guide you as to how much property you can buy. When you're new and looking to invest in property, start small and work your way up 

What's your budget saying? Keeping affordability in mind, you need to know that you can afford that repayment if something unplanned happens.

Return on investment (ROI): At the end of the day it's all about profit. ROI is the best measure taking into account income, expenses, capital growth, etc. Here is a great article that explains ROI in more detail

Net yield: The metric well published in sales material is gross yield. This is the annual rental from a property divided by the purchase price. It does not include expenses. Net yield includes all the costs related to the income and is then divided by the purchasing price. A positive net yield is what you are looking for and can be balanced with a deposit. Always aim for the highest net yield for the least deposit. 

 

You are in control 

Most people don't invest in property due to fear. What if the tenant doesn't pay? What if the property loses value? Aren't the interest rates too high? Is the property market in a downtrend? All these things add to the fear factor.

The characteristic I appreciate most about property investing is that you're always in control. You control the expenses, the income, and the asset. You can sell it whenever you like, increase your rent, etc. Being in control of your asset takes away a lot of the risks involved if you're willing to put in the proper research. 

 

Summary: 

Sure there's risk involved when investing in property, but well-controlled calculated risks take away a lot of the anxiety. Keep in mind that you are always in control and can get out of any property investment. Now it's up to you to take the plunge. 

Chat with us via email (info@finsesh.com) if you have any queries. We will gladly assist. 


 

If you want to find out more about becoming financially independent, please see our free course. If you want a blueprint toward financial independence, you can enrol in our Stages to financial independence course.

Onward to Financial Independence 

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