INVESTOR INTELLIGENCE
Cash Flow Positive
Property
CBD Purchases
BY PIERRE VAN DEN BERG
Prior to 2007 I did not even know of the existence of“ cash flow positive properties”. I got awakened only through networking with different property investment groups, specifically to examples in Johannesburg. Having been familiar to a scenario where it takes at least 5 years for your rental income to cover all compulsory expenses, this sounded like the way to go. But how is it possible to manage a property and tenant in Johannesburg if you live in the Western Cape? And how intelligent is it to buy property in Hillbrow, Berea, etc? Many experienced property investors will actually warn you against these exact actions.
Due to a persuasive agent I jumped in and bought my 1st cash flow positive flat during 2007 in Joubert Park [ 61 sqm, R 120 000 ]. And then the learning process started. Three years later I sold this property for a loss, because of a BC that became corrupt and non functional. But matters improved from 2010 as I got involved with a property investment group consisting mainly of Cape Tonians investing in Johannesburg cbd flats. I would not have pursued this option it if it was not for their support and guidance – advice as to which rental agent to use, the better and safer blocks to invest in, aspects to investigate before committing to buy, etc.
Having resigned from my job and not qualifying for further bank financing, it turned out that this option worked perfectly for me. With purchase prices this low I could still afford buying in cash, making use of access funds accumulated in an already existing bond. [ Buying in cash is not advised, as these riskier
properties should rather be financed ]. Doing the calculations, these flats are usually cash flow positive from day one. Generating a net monthly income, suited me like a glove. Although income, and not capital growth, is the main motivator for buying this type of property, my flats indicate an average capital growth of 10 % per year. After 6 years of ownership most of my flats are currently showing an annual ROI of between 14 to 22 %.
If this sounds like a fairy tale, maybe that is exactly what it is. This is high-risk property investment. The potential for things to go wrong is high. Most buildings in cbd are old and have not been maintained that well; the needed financial- and other skills lack among the trustees of Bodies Corporate; situations easily develop whereby a number of owners default on paying levies; often special levies are initiated to try and fund the most critical maintenance. Before opting to buy, a thorough due diligence should be done. Numerous aspects should be scrutinised, e. g. the financial status of the BC [ the majority of blocks in cbd are in debt with City Council ]. Although an over supply of tenants exist, a huge effort should be put into tenant sourcing to minimize risk and to only place the best suitable candidate.
My experience is that one should invest lots of personal time in the sourcing and management of these properties. Leaving everything in the hands of an agent won’ t be good enough to succeed.
RESOURCES
thankstoproperty. co. za
28 NOVEMBER 2016 SA Real Estate Investor www. reimag. co. za