INVESTING
property has expenses associated with it , such as rental agency commission , levies , rates and taxes , and maintenance . One must also keep in mind that you might not always have a tenant , so there may be some vacancy costs to consider as well .
When making your projections , it is always best to be conservative and base your calculations on 10 months ’ rent , budgeting one month for potential vacancy and one month for maintenance . According to Lightstone , the average Property Price Growth ( Capital Appreciate Rate ) is currently in the vicinity of ± 3 % a year and if you invest wisely , you can get a property that can produce a Net Rental Yield of 6 % to 8 %!
This means your total return will be ± 10 % on a low-risk investment , which is excellent ! A low-risk investment is one that keeps its value and slowly but surely increases its value and rental income , which should remain consistent and consistently grow .
It is also good to keep in mind that the average year-on-year Property Price Growth ( Capital Appreciation Rate ) for any consecutive 20 years in the last 50 years is significantly higher than the current growth rate . And since input costs , such as land prices , and material and labour costs , have increased significantly ( more than what property prices have increased ), it is very possible for property prices to start growing at a higher rate in the future .
Also , this is not considering that your rental income grows every year ( rental escalations ) or that you can buy a property at a discount ( below market value ). Both factors can significantly increase the returns discussed above !
When interest rates are decent or low enough , and Property Price Growth or Net Rental Yields are strong , leverage or gearing becomes an attractive strategy to increase your returns significantly . Unlocking the power of leverage – maximum returns through effective use Leverage means using Other People ’ s Money ( OPM ) or the bank ’ s money . So , instead of using your funds to invest in property , you can borrow money from the bank to build a large asset base without using any of your own funds , or at least very
47 JUNE / JULY 2023 SA Real Estate Investor Magazine