Not all properties are created equal when it comes to investment potential. Knowing how to spot the potential for greater returns is the key to building a stress-free real estate portfolio.
READ: Five property investment strategies for the novice investors
Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, explains that determining what makes a good investment property involves analysing several key factors that contribute to both short-term and long-term profitability.
“Almost any home will generate a return on investment if the owner waits long enough for the property to appreciate in value. With an investment property, though, you will probably want to generate that return sooner rather than later,” he explains.
According to Goslett, the trick with an investment property is to find one that is appealing enough to generate good rental returns in the short term while also having the potential to appreciate in value in the medium to long term.
“It can be tricky to strike this balance. For example, if you get into a new market early enough, you will most likely be able to purchase the property at a good price. As the area gets more and more popular over time, house prices will increase, and the resale value of the property will climb. However, as it’s a new area, you might not be able to charge as much in rent as you would in a more established area,” Goslett highlights.
READ: A seven-step novice guide to savvy real estate investing
Apart from this, RE/MAX of Southern Africa highlights other key indicators that real estate investors should consider before going ahead with a property purchase:
Vacancy Rates: Lower vacancy rates indicate a healthy rental market and steady demand.
Price Trends: Analyse historical price trends in the area to gauge potential appreciation and compare similar properties in the area to determine realistic rental rates.
Cash Flow Potential: Account for home loan repayments, property taxes, insurance, maintenance, management fees, and any other recurring costs against the potential rental income.
Economic Growth: Regions with growing industries, increasing job opportunities, and population growth tend to see better property value appreciation and higher rental returns.
Future Development: Locations slated for future infrastructure developments or urban renewal projects often see property value increases. Find out about the nature of the development first, as not all developments will be appealing (e.g. there is plans to set up a power plant nearby).
“A good investment property is one that offers a blend of favourable location, positive cash flow, and appealing appreciation potential. For the best chance of finding a property that meets these criteria, seek advice from a RE/MAX real estate professionals to make well-informed decisions tailored to your specific investment goals,” says Goslett.
READ: Becoming a property mogul in South Africa
Craig Mott, Business Development Manager for the Rawson Property Group, also shares the top 4 techniques used to build these high-performance portfolios that deliver mogul-worthy returns.
Don’t overlook an opportunity
“The best property investors keep a constant finger on the pulse of the property market,” says Mott. “They’re constantly on the lookout for optimal conditions and aren’t afraid to leap when an opportunity presents itself.”
Currently, Mott says the market is ideally positioned for portfolio expansion, with excellent lending rates and a wide variety of stock available.
“We’re seeing a lot of savvy investors using this time to fill gaps in their portfolios and implement strategic expansion strategies,” he says.
Build strategic partnerships
Becoming a property investment expert doesn’t happen overnight. That’s why most successful investors have a property professional on their team.
“Building a relationship with an experienced real estate and/or rental agent opens a lot of doors for you as an investor,” says Mott. “Not only can you get early access to prime, as-yet-unlisted properties, you also get up-to-the-minute advice on the latest investment best practices, legislative updates and property trends.”
Understand what success looks like
Bigger isn’t always better when it comes to property investment. According to Mott, the key metric to look out for is not overall portfolio value, but rather whether your total returns equal or exceed those of equivalent monetary investment funds.
“If, for argument’s sake, the same money would have performed better in a money market – before capital appreciation – you can’t regard that investment as being successful,” says Mott. “Of course, property investment is a long-term venture, so don’t be overly swayed by individual properties’ short-term performance. At the same time, don’t put all your eggs in the capital appreciation basket – investment properties shouldn’t need to be sold before they deliver profits.”
Never take performance for granted
Done right, Mott says property can dramatically outperform almost any other asset class. If it’s not living up to its full potential, it’s time to update your strategy.
“There are always going to be properties that don’t perform as expected, and these can drag the overall returns from a portfolio down,” he says. “Don’t fall into the trap of hanging on to this ‘dead wood’. The most successful investors do regular checks of each and every property’s performance. Those that consistently deliver below expectations, and cannot easily be remedied, should be sold to increase cash flow or finance more promising new investments.”
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