13:14 PM, 22nd November 2011, About 10 years ago
Welcome to the next four part episode of the “Property Maverick”. I will again try to make this episode fact filled, funny and light hearted. But the real funny stuff will come in “The Pros and Cons of being a Franchisee”, “The Bulgarian Fool’s Gold Rush”, and laughs a minute when Bob the builder goes property developing overseas. So whatever you do, don’t miss those episodes to come!
It’s been yet another two weeks of nothing but doom and gloom on the news front. Euro Zone Crisis this, Euro Zone Crisis that, bad bankers this, and bad bankers that. Maybe we should just line up all the bankers in one line, and stick hot crumpets where as it turns out the sun just didn’t shine after all.
The best advice I can give you on bad news that is beyond your control is to just ignore it, “Be Positive”. Just stick to your plan and your long term goals. Please tell me you do have a plan and long term goals? If not, then maybe now’s the time to start.
After all, how can a ship without a rudder, without a planned course, arrive at a desired destination? It can’t and sooner or later it will end up shipwrecked on the rocks!
“People with goals succeed because they know where they are going… It’s as simple as that.” We will deal with planning and goal setting in the “Philosophy for Success” episode in early 2012. Why don’t you set a goal right now to make 2012 your best investment year yet!
So let’s get started, but before that let me first take you on a journey back in time to where and how I became a “Value Investor” at heart.
Come to think of it looking for value runs deep in our family roots. Even my family ancestors to save money would buy only one burial plot. I remember as a child saying to my Father “Why is Grandmas grave so deep?” To which he replied “It’s better value; your Granddad will go on top later”. It was then I thought to myself. One day I will break family tradition and have my own grave. Who knows, thinking big, why not a Mausoleum!
My property journey starts in Cape Town, South Africa. The year was 1998 and six months after moving there, taking up a sales position in CCTV security. I decided at age thirty four it was time to bid farewell to the 9 to 5 routine, and say goodbye to my electronics career. It was time for me to stake my claim on the Cape Town property market. “If you want change you have to make it”. “If you want progress you have to drive it”.
First of all, and it’s important that you don’t forget this. Before you venture into any new or unfamiliar field you must first research it and study it in full. Remember knowledge is power! The practice and experience comes second.
After successfully studying and passing the South African Real Estate board exam. Gaining much property knowledge in the process, I was ready to begin the property search. It’s always good to understand both sides of the coin. Armed with some knowledge and a small budget I ventured onto the Cape Town real estate battlefield.
The search began for properties that were lower in cost, but still located in rentable areas that could provide a monthly rental that was greater or equal to 1% of the property purchase price (12% minimum Gross Rental Yield). In essence “Value Investing” is Lower Cost Property + High Rental Yield = Minimal Downside with good Long Term Upside.
Gross Rental Yield = Total Annual Rental Income divided by the Property Purchase Price, expressed as a percentage. Note the need to attain a high rental yield is even more important in a high interest rate environment. In South Africa at the time it was even more significant with only capital repayment mortgages available, and interest rates at 13%. In short a high rental yield was essential. Failing that you could well be in a negative cash flow situation from day one. The need to attain a positive rental cash flow from day one is important whether it’s Cape Town, Grimsby or Timbuktu. Unless you can afford to subsidise a negative rental cash flow with a high personal income? But this is not advisable!
Of course there are various schools of thought on this. Another thought is to buy the smallest property in the very best location. In Cape Town there was no better upmarket location than Clifton, over time the capital appreciation in Clifton in terms of numerical amount has been a whole lot more when compared to an average property purchased in an average location. However, I could never have supported many investments in an area like Clifton on my investment budget or personal income at that time. The negative rental cash flow would have crippled me in the short term.
Negative rental cash flow is exactly the reason why so many properties have been repossessed since the credit crunch. Wannabe landlords and Investors purchased purely for the perceived capital appreciation and not the rental return. They never considered the impact of negative rental cash flow. “You must always do your sums”.
Instead I opted for the safer bet of buying more properties in lower cost areas that offered higher rental yields. And I don’t mean areas that resemble downtown Beirut or a scene from a Spaghetti Western.
Be aware to pick your areas carefully and with due diligence. You must consider area factors such as employment, crime, rental yields, and tenant demand. Also, is the area presently regenerating or degenerating? Do your homework before buying, and not after!
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