Investor Homes
2014/07/02

"Buyers' Risks and Rewards"

So, you are looking to purchase an investment home. Or, perhaps you are looking to upgrade to a larger home without selling your current home. Whatever the circumstance that has brought you to the place of purchasing a property for investment purposes, there are a number of risks and rewards involved. This report will assist you in understanding the risk/reward matrix and help you on your way to passive income.

Let's look at the risks and rewards of property investment.

LANDLORD OBLIGATIONS

• Reward. Someone else pays your bond on your leased property. Great! So all I do is to rent out my new property and the tenant will pay for everything? Not quite.

• Risk. As a landlord, you will have an obligation to ensure that the property you are renting is maintained. This maintenance can take the shape of simple repairs or be as expensive as replacing a burst geyser or fixing damp caused by a leaky roof.

• Risk. While the number of tenants in South Africa is unusually high, it is littered with people who abuse both their landlords and the physical property alike. This is caused often by an innate lack of respect that tenants seem to have. Getting rid of a bad tenant can be extremely difficult, especially if you do not have the correct paperwork in place. To mitigate this risk, make sure you seek legal counsel when drawing up the lease agreement, and make sure to take a deposit on the rental that can be used to pay for damages that the tenant may cause.

• Risk. Tenants often have difficult months and sometimes will miss a payment or two. There are two ways you can mitigate this risk, and we suggest you do both: Put a clause in the lease agreement that handles lack of payment, and take two month's deposit upfront that you can 'use' if your tenant misses a payment.

DEFINE PROFIT!

• Reward. After a few years, I can sell the property and all the profit will be mine. This is mostly true (barring a prenuptial agreement or some other such document), once Capital Gain's Tax has been paid.

• Risk. In South Africa, SARS takes their cut in the form of Capital Gains Tax. There are a number of ways to ensure that (while still complying fully with the law) you pay only the minimal amount of tax. Talk to your real estate agent about purchase options.

LEGACY

• Reward. A property investment will survive you. In essence, you can bequeath the property to the next generation - leaving it as part of your legacy to them.

• Risk. Your property may not go to those you want it to! The risk here can be lowered by talking to your attorney and ensuring that your will is set out with clear instructions that leave no room for mis-interpretation for the disposal of your additional investment properties.

ESCAPE PLAN

• Reward. We all know how different areas and suburbs in South Africa go through crime sprees. Suburbs that start out as brilliant can turn into slums in a short timeframe. To limit this risk, consult with your area specialist Real Estate agent about the areas they have ear-marked as sound investment areas. While there is still the risk, getting the opinion of a person who is directly involved in the property industry before you buy can save you thousands later.

FALLING MARKETS

• Risk. As with any investment, however, there is always the risk that the investment will go through tough times. This can be clearly seen in the last few years where the property market literally fell through the floor! However, in this post-recession era, there has never been a better time to invest in property in South Africa. A person can purchase a home for a reduced price now, with the expectation of the price rising later in line with economic growth.

PERSONAL GAIN

• Reward. Stability. The stability created by owning an investment property often provides a sense of comfort to owners.

• Reward. Pure ego. Let's be honest here. Owning a house is, in itself, a great accomplishment. Owning 2 or 3 houses is even more so. There are no huge, un-philosophical risks associated with ego!

“An investment in knowledge always pays the best interest” -Benjamin Franklin

Realty King IPG

RTS 06/14