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28 Nov 2014

PROPERTY INVESTING GONE WRONG

Everyone who knows me knows that I am crazy about property investing. Since we started in our 20s, we bought ten properties in total and only ever sold one. We used all the acquisitions as some sort of exciting experiments. It was necessary to get diverse experiences from the industry to feed my inquisitive nature. To achieve that, we bought a property in town, properties in three different provinces, a bank owned property from an auction, property from a deceased estate, a townhouse, a property within a gated residential estate, a property in the boomed off community, a house we plan to rent out furnished and a house in a business street which we rezoned into a commercial property. That sounds like a lot of real estate investing but its actually not as huge as I make it out to be. The beauty with this approach is that, I can sit here on my bed and tell a story about all of that. I believe all my mistakes in property investing were meant to be shared, to save another South African from committing the same mistake.
Property Investing Gone Wrong:  Took this image in Brighton, UK
Whilst, I am clearly a fan of property investments, I believe in a diversified portfolio. I went crazy listening to the radio programme on property investing. An editor of one of the biggest property magazines in South Africa blurted out "you will never go wrong with property in the long run". The reason I almost took this personally is that, this is an influential person in the industry and a whole lot of us are listening with interest. In his defense though, he did add the last part... "the long run". Which waters the statement down but leaves it as inaccurate. With poor or no research you may go very wrong with property investing. Most of the mistakes I and others were ignorant to are easy to avoid like:

1. Poor Location
A bad location will always be a bad idea when it comes to property investing. Set your target market where the area is developing nicely. I now have a clear target market and clearly set areas or suburbs. I will not buy a bargain located outside my target area. If the property is residential, it has to be in a good proximity of good schools, shopping centre, medical facilities and exciting community amenities. I will not be desperate to give a property to the first prospective tenant that shows up. I have turned down four tenants in the past two months. Most new investors target young professionals like themselves, which I find to be a good strategy.

2. Bad Price
A great piece of real estate in a good location with a high price tag is a bad investment. An investor does a thorough homework way before investing (unless she occupies a space in those rapidly changing industries). Know the returns you want before you even start shopping for the property. Exercise your patience when searching for a property that meets that yield. The wrong price is a huge loss before you even start.

3. Initial Investment and Liquidity
Well, we know that you will require a deposit to acquire a new asset. That deposit amount, your deeds registration, transfer and bond registration fees will cost you more than most estimate. That should be OK because you are investing. In the long run, you are likely to get a lot of money from that initial investment. However, you are most likely to lose some money if you change your mind and sell that property immaturely. Even worse, you may have a lag between that decision to sell and getting a buyer. During the marketing period, your property may be vacant, sucking your reserves dry. This is the reason point number 1 and 2 above are the most important for an investor. Your investment is not liquid, you have to be in this for a long haul to recover your costs and get your returns.

4. Maintenance, Renovations and Repairs
As we all know, most tenants break stuff. Even if they are great tenants, wear and tear takes its toll on possessions. You will be fixing a whole lot of stuff in the long run. You need good planning, a budget, even handy skills and an emergency fund to take care of repairs. It is definitely not as bad as it sounds; I have done this for more than a decade without any fixing skill and interest to learn. Your rental yield calculation has to factor that.

5. Management, Rates, Taxes and Levies
You should take this into account when you are shopping for your property. If you collect R10,000 in rental, deduct all the costs like homeloan repayments (R8,000), levies, rates and taxes (R2000) and know that you are only breaking even. This is actually a good scenario. You may need to top up from your pocket like most of us do in the first few years of investing. There are property management costs which I forgot to add too.

6. Vacancies
Then you may have a period where your property is vacant and no rental comes your way. Refer to point number 1 to avoid this. Your location has to have a good rental demand. You can do this so well that you never get any vacancies in years. And that is not an exaggeration. But you may be in a bad market that your place exchanges too many hands, gets damaged in the process and costs you too much money. Point number 1 and 2 cant be missed in this process.

7. Bad Tenants
Even a vacancy is cheaper than bad tenants. Another reason to thoroughly screen your applicants.

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