Letting, investing and flipping property can be a rewarding venture, offering a steady income stream and potential long-term investment growth. However, navigating the real estate market requires a solid understanding of the market trends, and legal obligations.
Here to property experts provide insights into the letting and investment process.
READ: How investing in property can transform your life
According to Grant Smee at Leadhome/Only Realty, when it comes to purchasing your first property, conventional wisdom often points towards buying a home to live in. However, making your first property purchase an investment rather than a personal residence could be a gold nugget of advice. This strategy, particularly relevant for young South Africans, can set you on the path to financial growth and long-term wealth.
Start early: Invest while you can stay at home
As a young adult, you may still have the opportunity to live with your parents or guardians, significantly reducing your living expenses. This is an ideal opportunity for purchasing an entry-level property with the intention of renting it out. It's a no-brainer and will set you up for your journey as a property investor at a relatively low cost. The property can generate rental income, which, if managed well, can cover mortgage repayments and even provide beer money.
Make it a financial decision, not an emotional one
Purchasing an investment property should be driven by financial smarts rather than emotional attachments. Unlike buying a home, where factors like aesthetic appeal and location convenience play a significant role, an investment property is all about the numbers. The focus should be on rental yield, capital appreciation potential, and the ability to manage the property effectively. This pragmatic approach helps ensure the property generates a return on investment (ROI) over time.
Current Market Conditions
Interest rates in South Africa are currently high, with the repo rate only recently reduced to 8.00%, after a 15-year peak at 8.25%. The South African Reserve Bank (SARB) maintained this level for over a year to control inflation. However, there is growing anticipation that rates may start to decrease further, as inflation eases and approaches the midpoint of the SARB's target range. This shift could make financing a property purchase more affordable than in recent years.
READ: How to avoid buyer's remorse when investing in property
The thriving SA residential rental market
The rental market in South Africa is off the charts, particularly in major metropolitan areas like Johannesburg and Cape Town. Johannesburg is in high demand due to its status as an economic hub. At the same time, Cape Town offers lucrative opportunities in both the long-term and short-term rental markets via platforms like Airbnb. However, it's important to note that managing an Airbnb property requires significant time and effort. If you choose this route, consider whether you can dedicate the necessary resources or if you'll need to hire a management service.
Buy what you can afford, not what you'd like to live in
One key difference between buying a home and an investment property is that you need to base your decision on affordability and ROI rather than personal preference. When buying a home, getting carried away with features and locations that suit your lifestyle but stretch your budget is easy. With an investment property, the goal is to purchase something within your financial means that will generate steady income and appreciate in value over time.
An investment property as a way to build wealth allows young buyers to enter the property market with a lower financial commitment while gaining valuable experience in property management. The income generated can help fund future purchases, including your dream home, when the time is right. The key is to stay disciplined and focused on your long-term financial goals, avoiding the temptation to overspend on your first property.
Starting with an investment property is a smart way to build financial stability. By focusing on ROI and market opportunities, you can take advantage of South Africa's property market to generate income and secure your financial future.
Focus: Short-term letting
According Nox Property the Cape Town’s Atlantic Seaboard is experiencing some of the highest capital growth ever seen in South Africa offering homeowners incredible returns on their investment properties.
A recent report revealed rental prices on the Atlantic Seaboard to be around 15% more expensive than other regions in South Africa and growing at a rate of 9.7% per year. With demand driving up prices it’s not only locals who are looking for places to rent. Tourists who previously only visited for a few short weeks of the year during the peak season are now looking to spend two to four months every year in Cape Town. Factors like remote working, the experience economy and the depreciating Rand are contributing to this trend.
Nox Property reports that as at 1 September 2024 there are 11,392 active listings in Cape Town’s CBD and Atlantic Seaboard market. The market has seen supply growth of 17% over the past 12 months with an average RevPAR (Revenue Per Available Room) of R1,910.00. This gives a market size of around R8.5 billion.
Nox Property co-founder Richard Marshall says, “Tourism in Cape Town has made a remarkable recovery and is almost back to pre-Covid levels. According to Stats SA, air arrivals in Cape Town recorded a 13% year-on-year increase over the period January to April 2024, reaching 405,021, of which 91% were from overseas markets. Considering all the awards and accolades Cape Town is receiving along with our great weather, stunning landscapes and high-quality restaurants and attractions, it’s no wonder foreigners and semigrators from Gauteng and KZN see Cape Town as an attractive real estate investment destination. This coupled with a more favourable interest rate will certainly attract more buyers.”
“The income derived from short-term letting is used to support the holding costs of the asset (utilities, municipal taxes, holiday spending money, etc.). Properties under R20 million generally see a nett rental yield (post all costs) of between 6% and 8%, which is very dependent on the property itself as well as the capital financing structure," says Marshall.
Considering SARB could further reduce rates by another 50 basis points in November, taking the repo rate to 7.5% by year-end, Nox predicts interest in properties especially along the Atlantic Seaboard will continue to rise.
“With lower interest rates properties will increase in value further fuelling investors' decisions to buy a property with an intention to let. Until a decision is made on what the short-term rental regulations will be, this is not a market we see slowing down anytime soon," says Marshall.
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If you’re ready to make the leap and add property flipping to your portfolio, Claude McKirby, Co-Principal of Lew Geffen Sotheby’s International Realty in Cape Town’s Southern Suburbs offers the following tips to maximise your profitability:
- Choose the Right Location:
- Location is the most critical factor in real estate. Focus on areas with high demand, good schools, and proximity to amenities. Neighbourhoods on the verge of gentrification can offer great opportunities for profit.
- Buy Below Market Value:
- The key to a successful flip is buying low. Look for distressed properties, foreclosures, or auctions where you can purchase a home at a price well below market value.
- Accurate Budgeting:
- Create a detailed budget that includes purchase price, renovation costs, carrying costs (such as insurance, property taxes, and utilities), and a buffer for unexpected expenses. Be conservative in your estimates to avoid surprises.
- Prioritize High-ROI Improvements:
- Focus on renovations that offer the highest return on investment, such as kitchen and bathroom remodels, flooring upgrades, and curb appeal improvements. Avoid over-customizing, as you want the property to appeal to a broad audience.
- DIY Where Possible:
- If you have the skills, doing some of the work yourself can save a lot of money. Simple tasks like painting, landscaping, or minor repairs can be done without hiring professionals, reducing your renovation costs.
- Negotiate with Contractors:
- If you're hiring professionals, get multiple quotes and negotiate terms. Establish a clear contract to avoid scope creep and ensure the work is completed on time and within budget.
- Stay On Top of Trends:
- Be aware of current design trends, but also consider timeless features that appeal to most buyers. Neutral colour palettes, modern fixtures, and open floor plans tend to attract more potential buyers.
- Maximise Curb Appeal:
- The first impression matters. Invest in landscaping, a fresh coat of paint for the exterior, and a welcoming entrance. A well-maintained exterior can significantly boost the property's perceived value.
- Strategic Pricing:
- Price the property competitively to attract buyers quickly. Research comparable properties in the area and price your flip just below market value to create interest and possibly spark a bidding war.
- Timing is Everything:
- Timing your sale to coincide with peak real estate seasons, typically spring and summer, can increase your chances of selling quickly and at a higher price. Monitor the market and adjust your timeline accordingly.
