Real Estate Investing

I have seen many people getting burned during the past couple of years because if the wrong advice on real estate investment's.

I think this is because of all the hype about real estate investments in South Africa at the moment. There are some people marketing real estate courses that let it sound as if anybody can invest in real estate and make millions.

The true fact is that a lot of things have changed over the past 2 years. South Africa experienced a property boom. At the start of this boom we made good money. We could sign an offer on a new development and easily make R100,000 or more by the time it building has been completed. But all these new properties created another problem; At the moment there are an over supply of rental properties in some areas. What this means to the potential real estate investor is that your rental income will be very low because the tenants can choose where they would like to stay. They can bargain for a price because most real estate investors would rather except a lower rent than let his property stand empty.

This low rental income causes problems to the real estate investor. People do not realize that in order to buy rental properties, especially in new developments, will leave you with a huge shortfall which you have to cover out of your monthly disposable income.

To give you an example: We recently looked at a property in the Cape Town area. It is a rather good area, nothing wrong with the area. In this area are many townhouses and flats and there are a couple of new developments jumping up. This particular property would cost you R600,000 for a 2 bed 1 bathroom unit. The levy is R650.00 per month. Problem is that your rental income in that area for that unit is not more than R2400.00 per month. From that R2400.00 you deduct the 10% you pay your rental agent. That leaves you with R2,160 coming your way. However you are liable for about R6,700.00 of expenses each month. Thus you are left with a shortfall of about R4,540.00 per month. And this is where many potential property investors get themselves into trouble. You must be prepared to be able to pay this shortfall out of your pocket. I calculated that it will take more than ten years for this property to break even with a rent escalation of 10% per annum and 100% occupancy.

I do not say that real estate investing is a bad idea. I still think it is one of the best investments one can make. But I would like to warn potential investors to think carefully before you buy a rental unit. Can you afford the shortfall? What if the tenant do not pay for one or two months, would you be able to cover the bond?

This is one of the reasons why I am now looking at second hand properties which is cheaper and which is very close to break even point. If the property can break even in 3 years time I consider it acceptable TO ME. Remember that each person has a different financial situation and a different risk appetite. I also look at properties where you either get a cash back or rental assistance when you buy a new property. The cash back SHOULD be used to cover the shortfall and NOT to buy the big screen TV.

I teamed up with a company who go out of their way to find real good investment properties. They also help with the whole process, from the bond application to finding you a good tenant. They have a very good track record and also have frequent seminars that will teach you how to use real estate investments to create wealth. Go to www.realestatemillionaire.co.za to get invited to join the group.

I know that some people do claim that you can refinance your property after a year and use that money to cover the shortfall. I also use this technique in my portfolio but again the new investor must be very careful.

Let's look at the following scenario: You are poor and you are just earning enough. You are not happy with your financial situation and you also want to become rich and wealthy. So you see this ad in the news paper telling you that you can become a millionaire by becoming a real estate investor. You are extremely smart and dedicated and take 6 month's worth of party money to attend the course. You like what you see and you are all fired up when you walk out the door. You go out and buy one or two properties which both have a shortfall to cover. That is all you can afford on your current salary because the bank will not give you one cent more. You now have about R5,000 per month to cover in terms of shortfalls and you battle to hold your head above water. But you realize that you have to do this if you want to get out of the rut.

Now let's assume each property escalated in value of R100,000 each over the past year. Now you follow the advice of those who know and you apply for a second bond to refinance in order to cover the shortfall with the banks money. But during the past year you sold your old car and bought a new car, you got a new credit card and bought the big screen TV you husband was nagging about, etc, etc , etc. So you go to the bank and apply for a second bond. The bank look at your finances and they decline your application because you are over exposed. Now the picture does not look that bright anymore because you can hardly afford your shortfalls anymore. So then next thing you do is you sell your investment property. You probably are in financial trouble by now and you have to get rid of it quick, so you sell it at a discount.

And this is the reality that happens to a lot of potential real estate investors.

This is one of the reasons why I like this new credit act that was implemented. We get upset when the banks do not want to approve our bonds to buy more properties, but in the end it might be a good sign for you to evaluate your own situation.

Keep in mind that real estate investments are NOT a get rich quick scheme. It is one of the best investments you can make, but it takes time to mature. Also keep in mind that it is not some money game. You take on a huge responsibility the day you sign that offer to purchase.

You can also have a look at property syndications to create wealth. With property syndications you become co-owner of properties in the syndication and also shares in the profit of those properties.