Look the same, don’t taste the same: Standardise your investment model but develop gut feel

Article 5 of 8 in the series:

Eight Golden Rules of Property Investment - Article 5YDL Property Investment’s Eight Golden Rules of Property Investment

It is important that you are able to compare apples with apples on the fundamental issues when choosing between investment properties.  This means applying the same set of criteria to all of them and sticking to your chosen niche, quality and returns.

 

At the outset, it is important to decide what type of property you will consistently invest in.  There are many options available, but ideally your property should be something that ‘speaks to you’.  The options include:

  • Low-rise suburban flats and townhouses are probably the most popular buy-to-let investments.  They are usually sectional title units and a body corporate looks after costs such as insurance, cleaning, gardening and maintenance.
  • High-rise suburban flat are rapidly spreading over the world’s urban landscape, mainly around city centres.  They are part of the return to city living, which has gripped the world.  People want to live near their work so as to spend as little time in traffic.
  • Grand apartments are another phenomenon, happening mainly on Cape Town’s Atlantic coast and around the Sandton central business district.  Depending on their location, these properties are likely to grow in value faster than the average property.
  • Inner City flats are a fourth option.  In South Africa, inner cities are still considered high-risk areas because of the physical and social decay, crime and poor by-law control.
  • Low income suburban houses offer an interesting but high-risk investment opportunity.  Townships such as Soweto and KwaMashu have strong rental markets and the investment market is undeveloped.
  • Middle income suburban houses are in usually in older suburbs and provide solid, if unspectacular, rental returns.
  • Upper income suburban houses will tend to have low initial yields with high but volatile capital gains.  In South Africa, these areas often have the potential for densification, where a single home is demolished and replaced by three or four clusters.
  • Transitional suburban houses are usually on the periphery of prime areas and are often in older, slightly run-down suburbs.  They have some of the higher-yielding characteristics of inner-city flatlands with the potential to become future ‘hot suburbs’.
  • Golf Estates and other gates communities remain the suburban homes of choice for well-heeled city dwellers with families.  These typically have had solid capital growth, but there remains a danger of over-development in some areas.
  • Renovation properties are any type of residential property, in any area.  Investors purchase them and increase the income yield and capital growth by upgrading them.
  • Trading properties are mostly bought off-plan in new developments.  More and more developers are re-entering this market. Whilst the return on cash invested can be enormous this is not really investment, but rather treating property as a commodity for trading.

Knowledge is power, so as a prospective investor, you should endeavour to obtain as much information as possible prior to viewing properties for sale. But it is also important that you are able to see opportunities in potential purchases that others cannot see. You will not find these by studying your feasibility or some checklist of comparative properties.  You will find these by developing an insight that connects the many seemingly unconnected variables in and around the property.  It is called intuition or gut-feel and comes from the heart and the gut, rather than the head.

Gut feel or instinct will tell you that an area is about to take off.  Or that by knocking down a wall or two, you can increase the value by 20%.  Gut feel will tell you that the seller is more  – or less – negotiable than s/he seems.  Gut feel is a valued property skill and you should concentrate on developing it.  Considering that each property has its own identity, it is important to develop your own gut feel to assist you in making the right decision.

Having a passion for property helps.  So does experience.  Listening carefully to agents, owners and other purchasers helps too.  Do all these things and you will do better with your investment.

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