I fell in love with the idea of investing in property when I was sixteen years old. It all started when my family started watching an Australian reality TV show called The Block. Four couples each renovate one apartment of a subdivided building, and the person who sells their apartment for the most at the end of the season wins. I was hooked. I didn’t miss an episode (and this was before the days of streaming or DSTV catch up). Below is a trailer for a more recent season of the show – I’m pretty sure the season I watched wasn’t quite as cheesy as this one looks.
At sixteen though there was very little I could do about investing in a property (I was still six years away from actually earning a salary). So, in the meantime, I read books on the subject, in anticipation of the day I would be financially ready to make my first purchase. While I did learn a bit from doing this, there are some lessons that can only be learnt from doing it yourself.
About four years ago, I finally took the plunge and bought a small flat together with two other people. We managed to let the flat for two-and-a-bit years, after which we sold it. The experience was quite different to what I was expecting though. In retrospect, some of what we did was wise (more by luck than skill though), while there were a few other things that I would definitely do differently next time.
So if you’re thinking about investing in property for the first time, here is what I learnt from my first property investment
Partner with the right people
This is one of the things that we were lucky to get right. I’m a numbers guy. If there’s a financial projection with risks involved, I can do that. If you need to do calculations involving interest rates and the amortisation of a loan over a period of time, I’m your man.
What I am not, however, is capable of even the most basic home renovation tasks. My crowning achievement in this field was the time I re-wired a plug (under the watchful gaze and instruction of my dad, of course). Our property was not lettable in the state we purchased it in. This not only required us to renovate but to also put together a renovation budget. Fortunately, my first partner was an architect. He was familiar with estimating costs, determining what renovations we should do and negotiating with contractors. My role in the renovations was limited to Instagram posts.
My other partner was a real estate agent. His knowledge of the property market in Durban was invaluable and without him, we wouldn’t have found the right property to invest in.
My point is this; if you have gaps in your experience required to make a successful property investment, a great option is to partner with people who have skills you don’t.
Be on the same page as your partners
While I definitely benefited from the experience that my partners had, we weren’t exactly on the same page with regards to our ultimate goal. My intention was always to hang on to the property for as long as possible. The numbers I had calculated suggested to me that the long term return we would earn would be well worth it. My partners had a different (but not unreasonable) view and ultimately decided that they wanted to sell and realise their gains two years after we had bought the flat.
While in the end I was happy to sell as well, it did dawn on me that we probably should have cleared up what our goal was before starting. Property is not a liquid investment – it can take months or even years to sell and if you’re in a hurry it’s quite likely you will need to accept a low purchase offer. This experience showed me how potentially difficult it could be if some partners want to sell and the rest do not.
Tenants are a risk and managing them can be uncomfortable
As you might have wondered, if I didn’t contribute much to the discovery, purchase and renovation of the flat, what did I do? One of my main responsibilities was managing the tenant. If you’re reading this, you’re probably already aware that tenants are a risk – they might not pay the rent, it’s possible that they might damage your property or refuse to leave once the lease is up, etc. You have to accept this and allow for it when you assess whether you will purchase an investment property, and then do everything you can to manage this risk.
With that being said though, we were actually very lucky with both of our tenants. Both paid on time every month for two years, and they treated the flat with total respect. However, there was one uncomfortable episode where the body corporate claimed that our tenant drove into the fence and broke it. The body corporate wanted us to reimburse them for the damage. Our tenant said that the fence being broken had nothing to do with her and, as you would expect, refused to pay for it.
For someone who hates conflict, this was a difficult two weeks for me. If you are managing a tenant, especially if your property is in a sectional title building, there will be some conflict. Maybe you’re one of those people who loves dealing with people and sorting out problems and this doesn’t worry you. That’s great! For me personally though the next time I invest in a property I will quite happily pay a property management agency to deal with the interpersonal issues as they arise.
Pay for accounting and legal advice
I’m a sucker for proper documentation. I’ve lost count of the number of times at work where having good documentation has saved me a lot of effort, or how much time we’ve wasted when things are not so well recorded.
A property investment requires you to keep proper documentation so that you can assess your investment performance and so that you can report your earnings to Sars. One of the things we got right was to pay for an accountant to draw up our books. Not only were these financial statements incredibly useful in submitting our tax returns, the advice of our accountant was incredibly valuable. In particular, our accountant helped us to determine which of our costs were maintenance related (viewed as an expense to Sars) and which were renovations (viewed as capital expenditure).
We also saw a lawyer who helped us draw up our partnership agreement. He asked us all the right questions we needed to answer before we entered into a partnership.
These professional services aren’t free, but they are worth every cent.
Be patient, wait for the right property
FOMO is not limited just to social events – it is very possible to get FOMO when considering investments. Be honest with yourself: when the price of Bitcoin last year was rocketing upwards, did you feel a twinge of impulse to get in? I know I did, and I’m a fairly devout Bitcoin-skeptic.
An investment in property can bring out the same emotions. After we decided we wanted to partner in a property investment, we viewed what felt like dozens of properties. All that I wanted to do was get started, but we couldn’t find a property that we all agreed on. What that meant was that once we found the property we eventually bought, we knew it was the one. The asking price was so attractive that it provided a wide margin of safety. What that meant was that the stars didn’t need to align for us to make a decent return – we had some margin for stuff to go wrong and still make a satisfactory profit.
There will always be properties for sale, they won’t suddenly disappear. Be patient and wait for the one that your numbers can justify – without having to make unreasonable assumptions.
If you’re interested in buying a property as an investment there’s nothing wrong with reading as much as you can get your hands on. But there’s always something new you’ll learn when you actually do it for the first time. If you’re planning on taking the plunge for the first time I hope you don’t have to learn too many tough lessons!