Property is one of the oldest form of investment there is. It is an unusual type of investment as there are often misunderstandings about owning a property.
- Paying off a bond Homeowners who come into a lump sum often believe that settling their bond is a form of property investment and must be decided upon according to the pros and the cons of investing in a property. This is a misconception: the decision whether to invest in property or not was already taken when you purchased the property in the first place. Settling your bond is an investment in debt settlement and must be dealt with according to the merits of debt settlement alone.
- Buying a home If you do not already own a home and are living in rented accommodation, then the decision whether to invest in property or not, cannot be based on financial consideration alone. There are lots of invisible factors such as lifestyle and personal preferences that cannot be measured purely in monetary terms.
There is one school of thought in the financial advisory community that advocates that property investment of any kind (including owning your own home) is not viable. However, some of the benefits of owning your own home include the following:
- sense of security
- reduction of relocation costs – people with leases often have to relocate when they expire
- home improvements
There are numerous ways in which property can be purchased but some of the more common routes are:
- Residential property A second residential property can be rented out for income purposes or to cover all or part of the bond repayments. Capital gains (or losses) can be made upon the sale of the property. This is one of the most common forms of property investment.
- Commercial or industrial property This form of investment is more specialised and usually requires larger amounts of capital. Properties are rented to commercial or industrial tenants and income and capital gains stand to be made. This route can often include running your own business from the premises. Perhaps you are already in business and decided to purchase your own premises as opposed to renting from a landlord. You could also purchase a freehold business such as a hotel or a service station where the property is included with the business.
- Property syndication One of the ways to counter the large entry costs for commercial and industrial property is for investors to pool their money and buy property together. This can be done on a very informal basis (eg between a few friends) or it can involve buying into a professionally managed property syndication whereby a financial institution puts the whole scheme together and manages and administers it.
- Land Another route into the property market is by purchasing land. This is generally highly speculative and although fortunes can be made by buying in areas that later become popular. Bare land does not generate any income at all, and the loss of potential interest on the capital needs to be considered.
- Property Trusts These investment vehicles are a combination between a unit trust and a share on the JSE. Like unit trusts they pool the funds of many investors and purchase a portfolio of suitable properties (as opposed to a portfolio of shares). They differ from normal unit trusts in that they are closed-ended entities and can only raise additional capital by issuing rights to buy more shares.
Purchasing a property individually requires a relatively large amount of capital unless you go the syndication or property trust route. There is, however, a unique feature of property that is relevant here. Property is one of the few investments where finance is easily and readily available. The chances of a property investment going insolvent, depends entirely on your (or your tenant’s) ability to repay bond repayments. Individual properties in particular localities may be the source of exposure risk to the investor.