mt-header
Updated 11.06.2023

Property Investment – 5 Tips How to Invest, Pros and Cons

Property investment is the most reliable way of generating income in every part of the world. Not only is property investment a profitable endeavor, but it is also a safe one.  When purchasing property in South Africa, you will need to consider several factors before making a decision on the type of property you would like to purchase.

Property Investment south africa

There are many different types of investment properties in South Africa that investors can settle on. Each of these investment properties is best suited for various needs and preferences. Investors who are starting on their investment journey may need to consider the pros and cons of each investment property type, and how difficult it will be to manage it.

South Africa is a great destination for several different types of investment properties because of its strong economic growth potential. The region features some of the most modern cities that provide all amenities required by modern-day investors in Africa and worldover. A combination of dynamic labor, market growth, good education, and high salaries all largely contribute to the steadily rising demand for real estate in South Africa.

Types of Property Investment 

Here are some of the different investment property types available on the South African market for investors.

Residential Investment Property 

Residential investment property is one of the most popular real estate types for investors to acquire in South Africa. This investment property type is most often sought after by families or individuals who generally want a place to live in, with no intention of selling it in future for capital gains. This means residential investment properties are mostly bought as a holiday properties or for family use.

Residential investment property offers several benefits to investors as the majority of them feature relatively low vacancy rates and capital growth. They also do not need as much management as commercial investment properties do, even though you will still need to carry out minor repairs on them from time to time.

READ ALSO: How to Make Tax-Free Investment in South Africa?

– Commercial Investment Property 

Commercial investment property is majorly geared towards investors who have a higher budget and are looking to gain from the increased business activities, which is a significant source of capital growth in South Africa. Besides this, commercial investment properties typically come fully leased to tenants. As such, there is no need for investors to visit the premise weekly to collect the rent. However, this type of property investment attracts businesses of all kinds. Consequently, you will have to incur major repair and renovation costs. 

To qualify for a loan to purchase a commercial investment property, investors are required to provide proof of income from that particular property for the past two years. This requirement may not be viable for all potential buyers.

Retirement Investment 

Retirement investment property is one of the most attractive investment property types for investors, particularly if they are looking to retire in South Africa. Some of these properties are available fully furnished with a pool and can be rented out to tourists visiting South Africa, by investors, like any other commercial property. This brings in passive income to investors which is a great addition to your investment and traditional pension plan.

Agricultural Investment Property 

South Africa is among the countries with the best climates for farming across the world. Meaning, the region boasts plenty of opportunities for capital growth through farming, a practice that has been carried out for hundreds of years.

There is a constant demand for farm or agricultural products, which makes investing in agricultural investment property a lucrative venture, as you will have a consistent flow of income.  

Due to its isolated nature, the property can also be used for holiday purposes or as a primary residence. To top it off, it requires minimal to no management.

Holiday Home Investment Property 

Holiday homes have always been a popular choice among property owners, especially for those who are looking to acquire holiday home rentals to boost their source of income. A holiday home rental is a brilliant way to earn extra income for investors, particularly during the holiday season.

There has been a surge of people transforming their homes into rental properties to make a quick buck. However, you need to be aware of the implications involved before you proceed with this venture as it may not be as easy as it may appear. A holiday home rental business needs optimal levels of management and the ability to handle difficult situations. That is why it is vital for potential holiday home rental investors to carefully consider whether they have the resources and time to manage the property effectively.

Since many other holiday home, rental property investors are in the business, and with the significant difference in the average income levels in South Africa, rental prices have gone down. Many people are now looking for cheap bargains on holiday homes rather than the luxury types, meaning fewer tourists will be willing to rent out your property, making it difficult to earn a good income from the venture.

Investment Off-Plan Properties 

Investment off-plan properties are those that are made available for purchase before the completion of the construction process. This investment property provides multiple benefits for investors. The main benefit is the lower purchase price which provides more potential for capital growth after completion carried out by an approved contractor who specializes in constructing investment properties. This investment property type is also popular among buyers as they may re-sell these properties easily at higher prices after the construction is complete.

Property Investment Tips for the South African Market 

It is important to have the right tips before committing your money to property investment in South Africa. Here are some considerations you should have in mind.

Buy-to-Let 

Buy-to-let is a go-to option for investors in South Africa as it allows you to generate monthly revenue from properties in your portfolio. Like any other business venture, it doesn’t fall short of risks. However, with meticulous planning, buy-to-let offers a reliable source of income in the long run. Here are some of the tips to take into account:

  • If the property is bonded, you will be using the rental income to pay off the bond as well as any other expense, such as maintenance costs, at the beginning.
  • Your primary concern when deciding whether to invest in a property should be the potential rental yield. The property’s yield refers to the property’s annual rent divided by its value and expressed as a percentage.
  • Check the rental prices for other investment properties in your area to get an idea of the prospective rental yield on a property.
  • Consider studio and one-bedroom apartments for a buy-to-let property, as those investment properties have done consistently well over the last 12 years in South Africa.
  • If you are targeting the millennial market, be aware of the desirable features that appeal to millennials such as proximity to coffee shops and gyms, and good internet connectivity.

Buying and Renovating Properties to Boost the Value 

House flipping is a common practice in South Africa. It involves purchasing a low-value property and fixing it up in order to increase its value, then re-selling it at a profit.

It is important to note that :

  • Location is critical. Buy a low-value house in a good location, or an upcoming suburb. This will prove to be an effective investment strategy in the long run.
  • Bathroom renovation is relatively cheap but enhances the overall aesthetic appeal of your property.

Get Inside Information on the Property Market in South Africa 

As a property investor, you need to stay abreast of the trends in the investment property market, which can be affected by economic and political factors. Invest in an estate agent who will advise you on investment property trends, including the average value of properties in a particular area in South Africa.

Tips:

  • In the post-pandemic era, properties in scenic, remote areas have risen in demand as many individuals have resorted to working from home as well as spending more time at home.
  • Investment properties with sectional titles are performing well because of the desire for a sense of belonging and security.
  • As life expectancy for South Africans continues to increase, investment properties on retirement estates rise in demand.

Diversify Your Portfolio 

Do not become fixated on specific property areas or types. Invest in a wide range of properties, scattered across different regions, to make your property portfolio less susceptible to South Africa’s market fluctuations.

Tips 

  • Although commercial properties offer a higher return than residential properties, they require higher levels of management.
  • Mixed-use properties, which are properties that combine commercial and residential features such as coffee shops and gyms, are on the rise.

Get the Best Deal on Your Bond 

Most investors need to get funding before investing in an investment property. This is often attained in the form of a home loan provided by a bank. Since banks have varied lending criteria, some interest rates are more favorable than others.

Shop around for the best loan deals in the market before applying for a loan. You may consider employing home comparison services, such as ooba home loans, which can apply to several banks on your behalf in order to pick the best deal. Also, consider acquiring a range of tools such as the bond calculator and bond indicator.

READ ALSO: Offshore Investments – Everything You Need to Know

Pros and Cons of Investment Property 

As with all asset classes, investment property has its pros and cons.

Pros 

Property is a physical asset and not a paper asset, meaning that it is not something that could become worthless easily.

You can leverage property by renting it out to a  person who will pay off your bond. You may also need to top up a minimal shortfall monthly in order to acquire the property in its entirety.

As the owner, you have the right and the freedom to do anything with your property and revenue, such as upgrades.

You enjoy the benefit of owning assets rather than using and paying off your landlord’s investment.

Property can be used as collateral to further access finance. An access bond allows an investor to draw from the loan, offering liquidity for other expenses, such as purchasing another property.

A well-chosen investment property may offer both capital growth and rental income.

There are tax benefits to investment property in South Africa.

Investment property provides an emotional motive as one invests in an asset that can be touched and seen, unlike most investments.

Cons 

Owning a property in South Africa comes with considerable responsibilities, usually over long periods.

Property maintenance may be ongoing and quite costly at times 

Property ownership is a long-term commitment as property is a fixed asset. For instance, moving abroad may become tricky when you have a fixed asset back in South Africa.

The property circle moves fairly slowly. Therefore, investing in a property is a long game that requires a lot of patience.

You can not merely cash out should you have an emergency, selling property is a process that may take a long time. Property is very illiquid and cannot be sold easily to raise cash, as is with shares.

Tenants may cause severe damage to the property which could end up costing more in repairs than the deposit held.

It may also be difficult to evict a problematic tenant, meanwhile, you will need to continue paying the monthly expenses of the property.

The increase in rental may not always keep up with the increasing payments such as the interest rates. Consequently, the investor may be forced to pay into the property.

Your property value growth may be unable to keep up with inflation.

Property is a hands-on investment type. You need to be involved in dealing with the tenants and managing the property, that is if you do not have a managing agent.

The property is undiversified. A large sum of money sits in a single space, in the same country, in the same currency, and in the same asset class. Make sure your investment property is worth the risk.

Even though investment properties come with a couple of downsides, nothing beats the pride of being a property owner.

READ ALSO:

+ posts

Job is a seasoned writer with a good understanding of the emerging markets, Africa to be specific.