PROPERTY AS AN INVESTMENT OPTION

1 Jul 2011

Owning a property is a viable investment and has proven over time to be a major factor in the building of personal wealth. Well researched property investments have allowed many savvy buyers to live out the lifestyle of their dreams.

The biggest leverage that any successful investor possesses is knowledge. Knowing where and how to invest comes with studying the market and the current conditions. While current property market conditions favour buyers, one still needs to make an informed decision and look at all factors relating to the purchase such as the location and future appreciation potential of the property. These elements of property investment will always remain important regardless of the conditions surrounding the transaction.

Some may say that obtaining the necessary knowledge or consulting with financial advisers may be costly; however, ignorance when making an investment decision will be far more costly in the long run. Lack of knowledge could mean the difference between losing thousands and being able to enjoy an abundant life of financial independence. Although, having said that, real estate investment is far more forgiving than other vehicles of wealth creation.

Property is far less volatile than the equity or share markets. Generally property prices tend to increase fairly consistently over time and investors who look at property as a long term investment are able to gauge the estimated return on their investment much more accurately than any other investment class. Unlike other investment options, property does not have to be sold to reap the benefits of any growth in the market; property-owners will not have to sell the minute the market is at a high. Another advantage for property investors is that they have complete control over their investment and assets.

Furthermore property is one of the only asset classes that can be financed and leveraged. The ability to obtain the necessary finance is a key element in property investment - property is practically the only investment option that banks are willing to finance. This is because they know that if managed correctly and gauged against affordability ratios, the money they lend to individuals is being invested in an appreciating asset. If and when the property increases in value, the investor will get the benefit of the appreciation.

Most banks are willing to finance property because it a much lower risk than other asset classes. If the lender does default on the bond repayment, the financial institution has a tangible asset to resell in order to recoup their losses.

All investors are looking for an inflation-hedged investment meaning that the return on the investment either keeps up with inflation or outstrips it in terms of growth. Property is an inflation-hedged investment. While the outstanding mortgage amount will decline steadily, the capital value for the property will increase as well as the possible income generated through rentals.

As a South African resident the buying of a property will not attract tax depending on the method on investment. The investor may have to pay a Capital Gains Tax (CGT) depending on the amount of the property being purchased, however, this will only need to be paid once the profit of the sale is realised. The income received from a rental property will tax as normal but tax deductions can be claimed by the investor on the maintenance as well as the interest portion of the bond on rental properties.

Property is an important part of any investment portfolio but there are costs involved in buying and maintaining a property. If pre-emptive maintenance of the house is carried out there should be minimal attention and costs required in order to secure a profitable return. However, even though property is only expected to grow by a nominal 3% during the course 2011, investors should remember that it is the long-term view that counts. As a general rule the value of the property should appreciate by at least 15% before being sold to ensure that a profit is made. Property will remain a sought-after asset class in the future and a key building block to personal wealth.