The top benefits of real estate investment

When it comes to a long term investment, there are few asset classes that have the same benefits as property, especially when it comes to building a foundation on which to grow personal wealth. 

Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, says that many astute property buyers who have followed the key principles of property investment have been able to reap the rewards of their actions and see good returns on their investment. “Even with the correction in the market experienced post 2007, those who got into the market at the right time and made the correct decisions at the beginning of the process, would have seen substantial growth in their investment value,” says Goslett.  

He adds that the key to unlocking investment potential is knowledge. “Regardless of the type of investment, it is always best to choose something that you understand. For property investors it is important that they research the market and understand the environment in which they are buying, or for that matter selling property. Knowledge and understanding will play a vital role in the success of any investment venture,” advises Goslett. “Investors need to know what factors have an impact on the market, along with how these aspects influence the market.  All of the fundamentals of investment should be carefully measured to ensure that an informed decision is made. It is important to consider elements such as the property’s location, the type of property, market phase and future appreciation potential. Regardless of the circumstances surrounding the transaction, these elements should always be taken into account,” advises Goslett. 

Although there will be a fee, consulting with a professional financial adviser will assist the investor to make the best possible decision. “Seeking professional advice will come at a cost – but not seeking advice could come at a greater one.  Gaining insight from a seasoned property investor or financial adviser could be the difference between a sound property investment and pouring finances into a money trap.  However, having said that, a real estate investment is far less volatile and more forgiving than many other investment vehicles such as share or equity markets,” says Goslett. 

He notes that while the share and equity markets often fluctuate over the investment period, over the long term property values appreciate far more steadily. The property market is cyclical in nature, so if the investor watches and understands the market influences they will be able to time their entry into the market. When compared with other assets, property market cycles make it far more accurate to estimate a return on investment. While other investment options need to be sold at the exact right moment to reap the maximum reward, property investors do not have to sell only when the market is at its highest to see the benefit of the investment. 

According to Goslett, a major advantage to property investment is the fact that the owner of the property has complete control over their asset. It is also one of the only forms of investment that can be financed and used as leverage. “Property can be used as collateral against itself, so banks are willing to grant property buyers finance to buy. Because the value of the property continues to grow, banks know that they will be able to largely mitigate their losses by selling the property if the buyer defaults. As a result financing property is far less risky for financial institutions than financing any other type of asset class,” says Goslett.  

An ideal investment is one that outgrows inflation, or at the very least matches it. This is known as an inflation-hedged investment, of which property is one. As the value of the property increases over time, the outstanding bond amount will decrease. There is also the addition benefit of being able to let the property out and receive a rental income, which will assist in paying for the growing asset. 

Depending on the method of investment, another benefit to South African residents is that buying property will not attract tax. While Capital Gains Tax (CGT) may be levied at the sale of the property, this will be dependent on the amount that the property is sold for.  “If the investor chooses to let out the property, any income received will be taxed as normal, however the investor will be able to claim tax deductions for maintenance, along with the interest portion of the bond on rental properties,” says Goslett.

He concludes by saying that while it is feasible for property to be the backbone of an investment portfolio, investors need to keep in mind the costs involved of owning and maintaining the property. That said, the cost of pre-emptive upkeep is less expensive than waiting until something goes wrong. Maintaining the home will also help to ensure that the value of the investment continues to grow and show potential.