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Property: Do I buy when the market is up? Or when the market is down?

Jul 16 2017 15:11
François Janse van Rensburg

When is the right time to buy property? Smart property investors all understand that there is no right time to buy property, because spectacular property deals can be found in any market, at any time.

Notwithstanding this, they do take a calculated risk because they are confident enough to act against prevailing sentiment and are ready to take advantage of increased opportunities presented by a market that is experiencing a downturn.

Property investment is a long-term strategy. Therefore, the key to success is not timing the market, but rather spending time in the market. Property investment is unlike any investment in the stock market, where it is critical to get the timing right.

So in the greater scheme of things, there is never really a bad time to buy property, provided you have done your homework on the fundamental success strategies of finding the right property in the right area at the right price, with the right financing.

So instead of timing the market to determine the best time to buy, property investors do thorough research before buying, regardless of the cycle. They then spend time in the market. At whichever point in the cycle you buy, the cycle will complete itself and begin again.

While buying at the bottom of the cycle is ideal if you want to ‘time’ the market, it is certainly not necessary to miss a good property opportunity simply because of the cycle. It should, in general, still provide you with good returns, provided you hold the property for at least one full cycle.

According to Dr Koos du Toit, CEO of the P3 Investment Group, investment in buy-to-let property today is as good an investment as it was 10 years ago, at the height of the property boom. The idea behind buy-to-let property is not so much capital growth, but annuity income or passive income generation.

While the investor is drawing annuity income and capital appreciation on the underlying asset, the property will continue to appreciate in value, but how quickly or slowly this occurs is not the main issue. What is most important is to start investing in property as early in life as you can.

An acquired investor skill is to buy when the market is down and to act counter-cyclically. Of course, it is easier to buy when property price inflation is buoyant and credit is both cheap and easy than to buy when times are tough, property values are falling, lending criteria are tight and interest rates are high.

To do so requires great confidence and careful planning. Investing when the market is depressed and filled with negative news is counter-intuitive in the extreme.

But this is precisely what distinguishes the most successful investors from the rest – the ability to buy when everyone else is fearful and to resist joining the buying frenzy when the market is at its peak.

Successful investors negotiate on every deal. An advertised price may not represent a cash-flow-positive investment, but clever investors make the effort of negotiating a lower price nevertheless. About half the time they succeed, especially if they can offer cash to a seller who is pressed for time.

The advantages and disadvantages of property investment

Seasoned property investors will tell you about the various options you have when buying property for investment purposes: buy low and sell high; buy cheaply, renovate and sell; speculate by buying land, building on it and then reselling it; or focus on property development.

Some will point out the importance of diversifying when investing in property. However, in my opinion, all of these can be very risky.

If you invest in buy-to-flip or buy-to-sell properties, or in land to build on or develop, you will need large amounts of money or financial backing to carry you through the building and development phases, or through difficult financial times.

You also need to be able to forecast the economy and know the property markets. However, if you have not started buying property yet, you want to be guided through taking that first step to gradually start building a property portfolio.

This is why the main focus of my book, Making Money Through Buy-To-Let in South Africa, will be on starting small by buying property to let and not to sell. By investing in property in this way, you not only limit risk but also make use of the bank’s money instead of your own.

The next question then is what type of property would be the best to buy: a freestanding house, a flat, a townhouse or a cluster house in a complex? My advice for those who are new to the property investment game is to focus on buy-to-let property. Within this broader category, it does not really matter what type of unit you buy.

The advantages of buy-to-let units outweigh their disadvantages by far. Buy-to-let properties can often be, and usually are, bought with a bank loan or bond. This means that the rent you receive and any gain you make are based not on the amount you have paid to date, but on the total value of the property.

Your gain, in reality, is based on money that is not yet yours. By contrast, stock exchange shares and money market products usually require full payment upfront and are often subject to fluctuations.

Buy-to-let properties almost always give satisfactory capital growth in the long term, because housing is a primary human need and therefore always in demand. Also, there are usually housing stock shortages. It is an asset class that, although affected by economic swings, tends to be more resilient than others.

Over any 10-year period in South Africa’s history, a minimum growth of at least 45% has been achieved in property.

In addition, buy-to-let property investors tend to see their investment as a ‘forced’ way of saving that is not affected by fluctuations too badly; many fluctuations, in fact, turn out to be temporary.

The main disadvantage of buy-to-let property investment is that there could theoretically be periods during which tenants are in short supply. In such a scenario, tenants would be able to negotiate rock-bottom rentals. However, this has not been the case in South Africa for some time, and this scenario is not expected to occur here in the foreseeable future.

A more common disadvantage might be that, even in good periods, an investor might rent out his or her property to an unreliable tenant. This leads to investors and agents having to resort to expensive and time-consuming legal action to obtain a satisfactory outcome, possibly even an eviction.

This may involve drawn-out legal proceedings during which the owner will have to finance monthly mortgage bond repayments without regular rental income.

Unsatisfactory tenants have also been known to damage properties. To reclaim the cost of such activity is often difficult, even if it is legally addressed in the lease agreement or can be charged against a substantial deposit.

Always remember that your rental property provides in a basic need. As buy-to-let investments should be viewed as a long-term commitment, investors should, by the same token, choose an investment property on its potential ability to attract tenants five, 10 or 15 years down the line.

Location is of supreme importance. It is essential to identify the trends affecting various areas. You might find a property with a very high yield or rental factor in a very bad area. Or you might want to buy in an area that is popular now, but is showing some signs of decline.

Everyone needs a place to stay, so if there is a need for housing in a poor or ‘not-so-great’ area, and buying it makes financial sense, you should buy it.

But bear in mind that you might need to collect your rent in cash every month, which could be rather dangerous in high-crime suburbs. In such a case, you need to weigh up all the pros and cons very carefully before you buy.

This is an excerpt from François Janse Van Rensburg's book Making Money Through Buy-To-Let in South Africa ...Using Very Little of Your Own Money.

property  |  buy-to-let

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