Investing In Real Estate: Opportunities And Risks

Mar 5, 2024 | Property

Perhaps you’re looking for your next big investment and considering property as the way to go. If that’s the case, then you’re most likely doing your due diligence and exploring what’s happening in the property market, what you could make, and what could go wrong with your investment.  

The good news is that investing in real estate in South Africa can be a profitable and safe way to generate income over the long term. Property prices in South Africa have been increasing steadily of late, and that’s in spite of the chaotic few Covid-19 years that we’ve experienced. Essentially, the high levels of liquidity does, by all intents and purposes, indicate that you could invest in and sell property in exchange for a good price. 

That said, no one in their right minds would deny that investing in property can also be risky.  

To help you make an informed decision about whether this is the type of investment that you should venture into, allow this review of the advantages and risks to be your foray into the world of property investments. 

Why Investing in Real Estate Is Popular  

To put it simply, property investment is the purchase and ownership of land or property with the intention of generating a financial return. Apart from the fact that there’s enormous potential for capital growth, there are a number of other appealing reasons why you might choose to invest in property in South Africa.  

5 Lucrative reasons to invest: 

  1. High Financial Rewards: Property values appreciate with time, so if you invest early and hang onto your property, you could enjoy a high profit in time. 
  1. Tax Benefits: South Africa encourages property investment by giving tax incentives, such as tax deductions on all interest, maintenance, levies, insurance and all other costs incurred on the property. There’s also no VAT payable on property in South Africa, not forgetting the minimum 55% of the purchase price that you get as a tax deduction for every 5 properties that you buy.  
  1. Seize The Crisis: South Africa has a backlog of over 2.3 million units, a housing crisis that implies a large pool of eager tenants who promise a high property rental rates. We also have a growing middle class seeking more expensive homes, which suggests a higher growth potential for investors. 
  1. A Stable Market: South Africa’s property market is considered the most stable on the continent, making this physical asset a much safer investment. In short, you don’t have to worry about your investment suddenly losing value. 
  1. Relatively Low Interest Rates: If you hear that interest rates have recently gone up, make sure you balance this knowledge with the fact that it’s still relatively low. Early in 2023, interest rates were increased to 11,25%, which still sits below the average of 13% – 15,5%. 

There Are Risks 

When investing in property, it’s important to understand the risks involved. These will undoubtedly help you avoid making rash decisions and getting into financial difficulty.  

For instance, you should go into this understanding that there’s a fair amount of hard work involved (and extra money), such as garden services, insurance, maintenance, and rates, taxes and levies. Speaking of extra costs, you should also expect higher initial costs, like the deposit required, which is usually 10% – 20% of the total purchase price. There are also transfer duties, attorneys and transfer costs, and bond registration costs.  

Those are just the expected costs. There are also unexpected expenses that are out of your control, such as damages and loss to the property that are the result of natural disasters, fires and crime. Ideally, you should have insurance to pay for the big stuff when it comes to maintenance or repairs that are structural to the property, but you’ll have to keep up with your monthly premiums and pay the excess per claim. 

You should also be aware of the other risks: 

  • You could have bad tenants who cause property damage and emotional stress.  
  • You could have vacancies between tenants, which can be mitigated by rental insurance – but would be another cost to consider.  
  • Property is very illiquid, meaning you aren’t able to access your money quickly if needed. 
  • You could struggle to sell property in a hurry, so your money isn’t easily accessible whenever you want or need it. 

Cautionary Advice 

To get the most out of your investment, you need to understand how much money you have to invest and what you want to achieve. This information will inform your strategy. For example, if you want to generate an income out of your investment, you’re looking for property that you can rent out, but if you’re looking to grow your capital, then you’re aiming to invest in a property that you can sell later for a profit.  

What will help in this regard is becoming familiar with the different types of property investments in South Africa. These generally include buy-to-let, renovating properties to boost their value, and investing in a real estate investment trust (REIT). While you might be familiar with the first two options, the lesser-known REIT option is a company that owns and manages a portfolio of properties.  

By investing in a REIT, you are investing in a collection of properties, which means that you’ll need to do some research to find the best one for you.  

Knowing what you want will certainly help you to choose the right investment strategy.  

Feeling informed? 

Property investment can be a long-term commitment, and it may take years to see a return on your investment. We trust that weighing up the advantages and disadvantages will help you make the right decision. 

As you explore, don’t forget that AA Inform is home to a variety of tools that you can use to pick the right property, including Free Property Valuation Reports, Home Affordability Calculators, Loan Repayment Calculators, and even Bond Repayment Calculators

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