“And that is one of the most important reasons for anyone buying a new home to choose a property that not only meets their size and design criteria, but is also likely to deliver a good return on their investment,” says Bill Rawson, Chairman of the Rawson Property Group.
“The majority of South Africans are battling to make ends meet at the moment, but those who are homeowners are lucky in the sense that they are at least building up equity in their homes month-by-month as they make their bond repayments.”
Equity is the difference between the value of your home and the amount you still owe on your home loan, he explains, and while it should never be regarded as a substitute for actual savings, it does provide some financial protection in the event of a real emergency.
“It also happens to grow much faster if the value of your home is rising at the same time as you are paying off the bond, as does the potential ‘profit’ you are likely to make on your original investment in the property.
“If, for example, you purchase a R1 million property with a 10% deposit and the value rises by 5% in the first year, you will not only have added R50 000 to your equity in the property, but also made a 50% return on your original investment of R100 000.”
Indeed, says Rawson, one of most attractive things about investing in real estate instead of shares or other assets is that you generally only have to pay a small percentage of the purchase price yourself, but always get to keep 100% of the profit on the whole investment.
“However, there’s an old saying that you make the money when you buy a property, not when you sell it – which means that in order to maximise the profit potential of a real estate purchase, you need to seek out a home that is likely to show a substantial increase in value over the next five to 10 years and then try to buy it as cheaply as possible.”
Some vital things to remember while you’re doing this, he says, are the following:
* Make sure you buy a home in good condition. Renovations and repairs always take more time and money than you expect and tend to eat into the return on your investment, especially if you sell again relatively quickly. Besides, there’s always the danger with a fixer-upper of hidden defects in the plumbing and electrical systems, in the roof or in the foundations, and these are usually the most expensive problems to rectify.
* Don’t hesitate to negotiate. Even if you’re quite satisfied with the location and condition of a home you would like to buy, it never hurts to ask questions and see if you can’t better the price. If you can establish that the seller is moving to take up a new job, or has already made an offer on another home, for example, there will be some anxiety to finalise the sale and a lower offer might well be accepted.
* Consider buying a “distressed” property. Most of the banks have gone out of their way over the past few years to help homeowners who found themselves in financial difficulties and no longer able to afford their home loan repayments. And one of the most effective ways of doing this has been through their special “distressed seller” programmes. Certain estate agencies have partnered with the banks in these programmes, and while they would like to get the best possible prices, their main aim is to sell in the shortest possible time and the reality is that these homes usually do sell for less than current market value.
With some careful “shopping”, prospective buyers and investors can thus often acquire properties with good value growth prospects at reduced prices – or perhaps access areas they would not otherwise have been able to afford.
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