How To Start A Property Portfolio In South Africa
What is a Property Portfolio?
A property portfolio is the term used to describe the collection of investment properties that you own.
How To Start A Property Portfolio In South Africa
1. Define your property investment goals and strategy
Set yourself a specific goal that’s measurable and hold yourself accountable. A goal can be simple, such as a weekly passive income goal, which you can then expand to a yearly goal.
Or, your goal could be based on which type of property you plan to invest in, depending on your circumstances. Your strategy should center around your own income, and what you can afford.
You need to be able to put down a deposit to invest in a property, and this may impact whether your strategy is aimed at investment properties with high rental yield or high long-term capital gain. Use our borrowing power calculator to see how much you may be able to borrow for your investment property.
2. Understand the risks involved
It’s important to do your research. Investing in properties with the strategy of positively gearing, means you need to understand the financial risk of having time between tenants, where you will be financially responsible for the repayments of the property.
Similarly, investing in properties with the intention of negatively gearing them, means you need to be aware of the tax implications of claiming deductions at tax time and what you are entitled to claim.
3. Use your equity
Home equity is the difference between the current value of your home and how much you owe on your mortgage balance. For example, your house is currently valued at R400,000 and you still owe R200,000. You would have R200,000 in equity. If you’ve built equity over the years, you can use this to buy an investment property. This can be a good way to get your first property in your investment portfolio.
4. Consider joint ventures
Buying a property with someone can make it more affordable to get onto the investment property ladder. However, this can be quite tricky because misunderstandings may occur down the road. So it’s important both you and your partner have the same investment goals and strategies, agree with the terms and conditions, and with the ownership structure.
5. Do rentvesting
Rentvesting is when you buy an investment property to lease out, and then rent a property to live in. This strategy gives you the ability to maintain the lifestyle you want, while being able to start your investment portfolio.
6. Search for properties in locations with expected capital growth
Owner-occupied properties make up about 70% of the market. This means you want to buy a property that appeals to a large demographic, think of families, suburbs with good facilities like schools and shopping precincts. This means, generally, small new apartments in commercial high-rise buildings aren’t going to appeal to the majority of people, and historically, don’t generate strong capital growth. Remember, the location of a property is usually more important for capital growth than the house itself.
7. Consider buying off the plan
Buying off the plan for an investment property means you may be eligible for tax benefits. There are deductions you can make come tax time, so be sure to check with your accountant on how buying off plan can be beneficial as an investor.
In some states and territories, you may also be able to save on stamp duty because you’re buying a new property. Stamp duty is a compulsory government tax on purchases in Australia you have to pay when buying property.
8. Look at adding granny flats to add rental returns
Adding a self-contained unit, or ‘granny flat’ to your property can be a great strategy if you’re looking for long-term returns on your investment. It’s also a way to add value to a property without the disruption or risk of renovations or extensions.
If there are tenants in the home, you may be able to maintain a source of cash flow while building a granny flat. In the long-term, you have added rental returns to your property by having another ‘property’ to rent out.
9. Create positive cash flow
Positive cash flow is where the rent is higher than the mortgage repayments and expenses. This means your rental income can cover the monthly repayments. If you create positive cash flow in your investment property, and you continue to purchase investment properties that generate positive cash flow, you will be able to service the loan and buy more property to build your investment portfolio.
10. Renovate
Capital growth is not the only way to increase your rental income and value of your property, you can also do this by renovating your investment property.
You could renovate the kitchen or bathroom for a better rental return, or you can also do minor renovations like a new coat of paint or a new carpet. Increasing your rental income can help you service more properties and also increase your equity which you can use to buy even more properties.
Frequently Asked Questions (FAQs).
What is meant by property portfolio in South Africa?
Put simply, a property portfolio is the term used to describe the collection of investment properties that you own. This can include student lets, a holiday home in another country, HMOs (House of Multiple Occupancy) and even commercial properties.
How many houses is considered a portfolio in South Africa?
If you have four or more mortgaged properties, you’re classed as a portfolio landlord. You’re not a portfolio landlord if: You own three investment properties.
How much of my portfolio should be real estate in South Africa?
Dr. Johnson said the “optimal mix” in a portfolio is 50% real estate, 30% stocks and 20% bonds. This formula, he said, would be considered sufficiently diversified to provide stability in retirement. The real-estate component can include your personal dwelling, investment property or a mixture of both.
Is buying a house a good retirement investment in South Africa?
Housing costs will be part of your retirement budget, whether you rent or own. Fluctuations in market value, unexpected maintenance expenses, and insurance deductibles can increase ownership costs. Though homes can be valuable assets to own, they shouldn’t be purchased primarily for investment.
Do you include home equity in net worth in South Africa?
Your home equity is what adds to your net worth. Your home equity is simply the difference between the value of your home and your mortgage. If you own a R500,000 house with a R400,000 mortgage, your home equity is R100,000, which increases your net worth by that same amount.
How much rent income is tax free in South Africa?
How Much Rent is Tax Free? A person will not pay tax on rental income if Gross Annual Value (GAV) of a property is below Rs 2.5 lakh. However, if rent income is a prime source of income then a person might have to pay the taxes.
Is it cheaper to buy a house or rent an apartment in South Africa?
Which is cheaper? In the short term, it is often cheaper to rent in London. This is because the rent you pay is likely to be lower than your mortgage repayments, and the deposit on a rental property is significantly less than the initial costs of buying a home.
Is buying a home worth it in South Africa?
If you’re a homeowner, chances are you’re worth much more than someone who rents, according to the Federal Reserve’s 2020 Survey of Consumer Finances. Homeowners have a net worth that is more than 40 times greater than their renter counterparts, which reinforces the idea that owning a home is a smart financial move.
Is it worth becoming a landlord in South Africa?
Being a landlord is a great way to make some extra money and provide a steady stream of income but it is not a viable option for everyone. Novice landlords should be certain they can afford the upfront and ongoing costs involved in managing a property.