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Keeping your head above water

Timing will always remain the most crucial component of any property investment. Those who understand the dynamics of the property market will always have a distinct advantage over those who go with the flow waiting for the situation to improve and thus often missing the boat completely.

Adrian Goslett, CEO of RE/MAX of Southern Africa says that property cycles follow a predictable pattern and that property booms are inevitably followed by slumps before recovering. “Anyone who lives with the belief that the boom times will never end are deluding themselves and those with this mindset inevitably set themselves up for failure.”

He says that knowing when to invest will always be crucial in ensuring that a property portfolio, regardless of its size, remains profitable. “Over capitalising on any investment is never recommended and many have found to their detriment that buying at the height of a boom, when prices are at their highest, can prove to be a costly mistake.”

Unfortunately the “buy-to-let” sector of the market is often the hardest hit by property slumps and affects those who rely too heavily on income garnered from this form of investment. Goslett says that while property will always be a sound investment, investors should understand their limits, and slowly build a sound property portfolio, armed with the right knowledge, that virtually guarantees success.

“The wrong choices can prove costly and as has been seen during the previous slump, lead to over-indebted homeowners being forced to sell when market conditions are not favourable. Not being able to meet bond instalments and other financial commitments when times are tough can place the owner under considerable strain, however, there are steps that you can take in order to avoid financial disaster.”

Trying to predict when market conditions are going to change for the better or worse often proves extremely difficult for even the most knowledgeable economists. Property has never been a short term investment and anyone who is considering entering the property market needs to understand that although there have been cases where investors have made a ‘quick buck’ these cases are the exception and this form of investment should be viewed with caution. Goslett says investors need to err on the side of caution, assessing their finances to ensure that eventualities such as interest rate escalations, municipal rate hikes and the like are budgeted for.

Another area that all investors should consider is having a contingency plan in place should the tenant renting out the property either default on the payment or abscond.  “In an ideal world, investors should never have to rely on rental payments to cover the costs of the bond – and should be financially strong enough to weather a short term financial storm,” he says.

Goslett notes that anyone entering the property market should conduct a stringent assessment of all costs and obligations from the onset as well as furnishing a deposit to ensure that there is equity in the property that will cushion the owner in the event of a downturn.

“One of the positive aspects of the economic downturn is that South African banks have had to review their lending policies and although many would prefer the banks to be more lenient and grant more bonds, the days of irresponsible lending are well and truly over. Banks have also had to review their approach to defaulting bond holders. Although financial institutions are still foreclosing, they have adopted a far more lenient approach toward homeowners who find themselves in financial difficulty. This, however, is often a two way street and those who take evasive action and approach the banks as soon as problems arise often find that the banks are willing to make allowances,” says Goslett.

He concludes by saying that good old fashioned values of being able to manage your finances and debt, investing wisely armed with a sound working knowledge of how real estate market cycles fluctuate and knowing when and where to invest will undoubtedly prove to be a winning formula for all concerned.


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