Build your Wealth by Investing in Property
Category Advice
The opportunity to create lasting wealth is a long-term goal for many individuals as it offers security, growth and allows you to make your money work for you. There are various ways to create wealth, such as through property, retirement funds, unit trusts, stokvels, shares and the stock market.
With so many options at your disposal, navigating the various investment options will be daunting at first. However, the good news is that with enough research and expert advice from financial experts and established investors, you will gradually build your confidence and gain the right knowledge to create lucrative investments.
Property is the way forward
The residential property market is a good place to start for first-time investors as it is relatively easy to understand and get started.
There are various ways to invest in this market including:
1. Buy-to-hold property investment
This type of investment yields profits after a long period of time, usually around 10 or 20 years. It involves an investor buying a property with the purpose of selling it in the future after it has appreciated in value. If you’re deciding on this type of investment then it is important to sell it at the right time when the market favours sellers and when the equity (the difference between its market value and the bond) is favourable.
2. Buy-to-sell property investment
Although this form of investment is similar to buy-to-hold properties, the difference is time. After the property is purchased, it is sold shortly after. Buy-to-sell properties yield short-term gains and are very rewarding if property prices are increasing rapidly as this will allow you to resell at a high price.
3. Fix-and-flip property investment
This investment involves buying property, upgrading it and then selling it a profitable price. Properties bought to fix-and-flip are usually in a bad condition, however, they are situated in a good area that fetches favourable prices after the value is added through upgrades.
4. Buy-to-let property investment
Buy-to-let is the most popular form of property investment owing to ongoing capital growth, and passive and inflation-linked income that is generated almost immediately. This involves buying a property to rent out, which is usually a sectional-title home that is modestly sized and affordably priced.
Of these four types of property investments, buy-to-let properties have become the most widespread owing to a number of local factors that have boosted its popularity. Firstly, in South Africa, there are a number of people who cannot afford to buy a home as many are denied home loans, in this case, their only option is to rent.
Secondly, in the current economic environment, the majority of working-class citizens are cash-strapped due to the high costs of living. Instead, they are opting to rent for longer periods of time and are delaying buying their own homes until they can afford to do so. Lastly, many people simply find no need to have a property in their name as they feel that renting offers them more flexibility and affordability.
Regardless of the reasons behind SA’s culture of renting, it is a smart investment that many small-scale investors are now using to their advantage.
The financial principle to build wealth
A lesser known fact about buy-to-let property investments is that you do not need money to make money. Although this seems like a line out of a cliche “get-rich-quick” handbook, there is a fundamental financial principle behind it. The principle is known as leveraging or gearing, and it refers to using other people’s money instead of your own for investment purposes.
In the buy-to-let market, you can implement leveraging by borrowing money from the bank to buy your investment property. Although the interest rates attached to bond repayments may deter many investors, the buy-to-let model allows you to make repayments using the interest generated from the rental income each month. This means that you can easily pay off your bond within as little as 11 years using the money paid by your tenants. And within this time, the value of your property will appreciate and your monthly passive income will increase due to year-on-year inflation.
With so many ways to create wealth, buy-to-let investments are undoubtedly one of the smartest ways to make this wealth last well into your retirement years. Ultimately, it can be viewed as the asset that keeps on giving.
Author: De Lucia Group
