While increasing numbers of South Africans are realising that property - whether listed property shares, a buy-to-let property or even just paying off your own home - is the lower risk investment that produces excellent returns, the issue about when to buy property continues to be debated in the media. The debate is pointless when it comes to investing in residential property, according to Dr Koos du Toit, CEO of P3 Investment Group.
"Trying to 'time' the market, as investors in shares on the stock exchange do, is only necessary for those who are speculating with property. Speculating - buying with the hope to sell again quickly at a significant profit - is not property investment," explains Dr du Toit. "For those who are investing in a home to settle in or for those who are investing in a buy-to-let property to benefit from the ongoing monthly income and long-term capital growth it produces, the short-term fluctuations in the property market are not nearly as important as the length of time spent in the market."
To illustrate the point, Dr du Toit provides a simple, but powerful example. "In the mid-eighties, you could buy a spacious four-bedroom house with a double garage for about R100Â 000, and a two-bedroom flat for R25Â 000. That same flat was selling for R400Â 000 in 2005. If you had bought it in 1985, it would have been paid off by 2005, worth a whopping R400Â 000 and producing a passive net rental income of R2Â 500 per month! Today, it would be worth closer to R500 000 and it would still be producing a rental income â€“ only now that rental income would be around R3 500! Had you known this in 1985, would you not have considered it a good time to buy, irrespective of the property price growth rate at the time?"
The reality is that the rate at which property prices grow every year fluctuates over the short term. For example, it has dropped from the heady 25% at the height of the property boom in 2006 to the relatively muted single-digit growth we are experiencing now. But over the long term, property prices continue to rise steadily, compounding year after year, at a pace that - at the very least - keeps up with inflation.
"While we can't go back to 1985, we can use the perfection of hindsight to build a financially secure future," notes Dr du Toit. "If we forward the clock 20 years to 2032, you may well find that now is the right time to buy. You will not be able to buy an entry-level property in 20 years' time for the price you would pay today. So let's say you acquire a two-bedroom flat as a buy-to-let investment today. In 2032, your children will be wide-eyed with amazement when you tell them that you paid just R600 000 for it, because by that time, assuming an average 10% per year capital appreciation - it will be worth closer to R4 million. Of course, by that time the two-bedroom flat will also be paid off, but each month the rental is still paid into your account, as it has been for the last 20 years. The only expenses you will have are the property management fees and some maintenance costs. However, the rental more than covers the expenses, because the rental has increased each year an d, assuming a standard 10% annual increase, will be around R21 400 per month in 2032. Bear in mind that this rental is passive income - it is paid into your account whether you work or not, whether you are at home or on holiday."
Understanding that property is a long-term investment, it becomes clear that the best time to invest in a buy-to-let property is always as soon as possible - or now. Each year you wait, you lose a year's worth of rental income and a year's worth of capital growth. And soon, one year becomes two and then twenty, because the time is never quite right if you take a short-term view of the property market.
"While the right time to buy a property is always now, given a long-term view of the property market, this certainly doesn't mean that you should just buy any property. Whether the property market is up or down, homebuyers and property investors should always ensure that they buy a solid, well-maintained property in a good area with long-term growth prospects and that they pay a reasonable, market-related price for it. No matter what the market conditions or whether you are buying a home or a buy-to-let investment property, the numbers must make sense. If you follow this advice, and a few tried-and-tested strategies for ensuring you acquire the right property, chances are good that in 2032, you will look back at 2012 and think: '2012 was certainly a great time to buy property!'," concludes Dr du Toit.
Courtesy: P3 Investment Group, the leading property investment club in South Africa.