With the fast-changing economy in Africa, it is safe to build a strong investment portfolio that will sustain you for generations to come. Over the past few years, many investors have opted to invest huge sums of money into cryptocurrency, the stock market, real estate, and NFTs. With all these being very lucrative investments, real estate tend to stand out as being one of the safest ways to invest your hard-earned money. Why is this so? This is because, under favorable circumstances, real estate not only offers you a lower risk for your investing dollars but also yields better returns and provides greater diversification. In this article, I take you through everything you need to know about investing in real estate in South Africa.
Whether you are planning for retirement, looking forward to earning a residual income or saving for a college fund, real estate will see you through achieving your goals. However, you should not go into this field hoping to make quick money. Many enter into the real estate world hoping to make it after a short period and end up disappointed when things don’t work as they envisioned. With that being said, you’ll have to have extreme benefits to reap the long-term benefits of real estate.
Everything you need to know about Real Estate investing in South Africa
What is Real Estate?
Real estate is a property that comprises land and improvements such as buildings, roads, fixtures, utility systems, and structures. In simpler terms, it can just be defined as physical land, structures, and resources attached to it.
How to Invest in Real Estate in South Africa
Real estate investing in South Africa can be carried out in different methods. This include:
Investing in Rental Properties
Many individuals living in major cities in South Africa tend to prefer renting property rather than building one. You can chip in to build rental houses and become a full-time landlord if you desire. Take note that as a landlord, you’ll be responsible for major issues concerning the rental property such as paying the mortgage, insurance, and property taxes. Over and above that, you’ll be responsible for finding clients and maintaining the property. After acquiring certain rental properties, you’ll have to set suitable rent charges suitable for both parties (you and the tenant). Although rent charges may vary due to where the property is located and other factors such as security, it is important not to set a price that is too high since this might chase clients away. Additionally, don’t set rent charges too low to avoid operating at a loss.
The key to renting property is to first set prices that will enable you to pay off the mortgage after which, the rent becomes profit in the long run. You can use the profit to build another rental property or invest in other assets. Apart from rent, you can earn revenue through appreciation where you sell the profit over a given period or borrow a loan against the properties’ equity to make other investments.
This is one of the most effective ways of making money with real estate. As a real estate flipper, you will be involved in buying a certain property, hold it for a period not exceeding four months, and then immediately sell it at a profit. However, it is important to note that there are two major approaches towards flipping houses which include:
- Hold and Resell- This is the most common approach where you buy a property in a rapidly rising market. As mentioned earlier, you’ll only hold the property for three-four months then sell it at a profit then move on to the next.
- Repair and Update- In this approach, you can buy a property that can increase in value once it is repaired and updated accordingly. After calculating the total cost including renovation costs, you then pitch for a buyer to acquire the property at a higher price.
The only risk with this method is that you are likely to sell the property at a price that gives minimal or no profit at all. To be safe, you should conduct adequate research on the best approach to house flipping.
Real Investment Trust (REIT)
If you intend to start real estate investing in South Africa, then this is also a lucrative field to venture into. REITs allow you to invest in real estate without actually owning physical real estate. They are formed when a corporation uses investors’ money to purchase, operate, and sell real estate properties. With this, all you have is to purchase a REIT that fits your budget. To get a publicly-traded REIT, you will need to own a brokerage account. If you lack one, you might open one immediately since the whole procedure takes less than 15 minutes.
REITs are a good option if you prefer regular income. Nonetheless, they aren’t limited to appreciation. Most REITs invest in properties such as healthcare facilities, office buildings, malls, and mortgages. They are also highly liquid which is a huge advantage.
Real Estate Investment Groups
REIGs can be classified under small mutual funds for rental properties. They are formed to help you own a rental property without actually becoming a hands-on landlord. To become part of an REIG, you’ll have to invest a given amount of money in a company that had built or bought a set of buildings. Mostly, the properties include apartments. As an investor, you can own one or multiple units of the property. All the hassle and bustle for finding tenants, maintenance, and advertisement is done by the company. In return, they will only take a given amount of the monthly rent.
Why invest in Real Estate in South Africa?
Real estate is one of the greatest ways to build your investment portfolio. The market is amongst the low volatility investments as compared to equities and bonds. As the world continues to diversify, real estate tends to gain more popularity compared to other traditional income return sources.
Benefits of Investing In Real Estate
- Great Returns
- Steady Cash Flow
- Long-term security
- Passive income
- Tax advantages
- Has the ability to leverage funds
Although Real Estate comes packed with numerous benefits, it has its share of limitations including:
- Real estate poses a high transaction cost
- Real estate has low liquidity
- Real estate markets have significant inefficiencies
- It requires professional management and maintenance
Weighing the benefits of real estate against the limitations, it is safe to say that this is a very lucrative investment to consider. However, it will require you to put in a significant amount of money to see great returns. Another thing to take note of is that, if you go with the mentality that you will make millions in the first few months, then you’ll probably get divested. The key is to start small while aiming big.