10 SCORECARD VARIABLES
FINANCE
Choosing the Right
Investment Property
Evaluating the break-even and condition
BY GERT VAN STADEN
Selecting the right investment properties is fundamental to the success of your property investment success. If you choose the right property, you can be almost assured that you will enjoy good capital growth for many years, and that the property will rarely- if ever- be vacant, which will practically guarantee your property investment success.
For this reason, we have come up with a 10-point Scorecard to evaluate each potential investment property before making an investment decision. In this article we look at the break-even point in the investment, as well as the condition of the property as important variables in your property investment success.
Break-even It is certainly possible to find cash-flow positive properties ie buy-to-let properties that immediately generate sufficient rental income to not only cover all the property expenses but also produce a surplus. However, most investment properties will initially have a monthly shortfall: the amount by which the property expenses exceed the monthly rental income and which must be funded by the property investor. This monthly shortfall reduces year after year as the rental income increases until the break-even point is reached ie the point at which the rental income covers all the expenses and produces a surplus.
Understanding exactly when break-even point will be reached and how much the shortfalls will amount to are crucial investment factors. So how long and how much is acceptable? The answer is: it depends. This is because the break-even point is a dynamic factor that fluctuates with the interest rates and the level of market-related rentals. For this reason, P3 Investment Group members use custom-designed software that
allows them to look into the future and determine whether the break-even point and the out-of-pocket investment in covering the shortfalls are acceptable given the return on the investment.
Condition of the property The condition of the property is an important variable as it affects the rentability of the property, the rental obtainable and the maintenance costs. The older a building, the more maintenance may be required. Second hand investment properties should be inspected by a NACHI( National Association of Certified Home Inspectors) registered property inspector, who will provide a report detailing defects, repairs and maintenance issues, the cost of attending to these, as well as the estimated cost on ongoing maintenance required, to guide the investor’ s buying decision. These costs can then be factored into the cash flow projections using advanced software to determine the impact thereof on the return on investment, allowing investors to make informed decisions about the viability of the investment.
10 SCORECARD VARIABLES
1. Price 2. Rental income 3. Break-even 4. Condition of the property 5. Vacancy 6. Area 7. Levies and taxes 8. Affordability 9. Control 10. Bank valuation
RESOURCES
P3 Investment Group
24 AUGUST 2016 SA Real Estate Investor www. reimag. co. za