Expert provides advice about building a portfolio
Continued local and international market volatility has many South Africans actively looking to create a property portfolio, especially with stalling prices in the ongoing buyer’s market.
However, good investment choices are based on more than just good properties in good areas, says Gary Palmer, chief executive of Paragon Lending Solutions.
In fact, capital growth cannot be a cornerstone, he says.
“Investors should be looking for properties which immediately generate income and have the ability to deliver sustained, secure income growth over time. Just focusing on the property appreciation over time will not yield the kind of growth their portfolio requires.
“Properties drain cash. Upkeep, increasing rates and taxes and other expenses mean investors must look for good cash-generating properties if they hope to build a growth portfolio.”
Palmer says the earnings and serviceability of an investor’s first property, rather than its resale value, will be closely scrutinised by lenders when they look to secure a loan for the next property purchase. So, investors do not just have to maintain their properties but “constantly find ways to nurture their investment over time”.
The days of yield compression are over and you now need to find ways to add value to your tenants and the property itself, he says.
At this time, the lure of owning international property can be “intoxicating” and investors, if they can, should spread their portfolios to include some exposure to foreign income. However, the local market is offering excellent value.
“Being close to your asset means you can take a much more effective and hands-on approach in terms of managing and overseeing your investment.”
While buying a property with great returns is the goal when starting a portfolio, Palmer says it is prudent for an investor to be realistic, especially when adding a property to investments.
Signing long-term leases with stable tenants is a sound first step, but even the best laid plans can hit a snag. Therefore, when preparing forecasts for lenders ahead of their next purchase, investors must ensure they factor in a few months without their rental income, Palmer advises.
“Should your tenants suddenly depart, you don’t want your investment plans to fall apart. You can be sure potential lenders for the new property will have done the same when they assess your risk profile.”
On the whole, getting into the property market can be a challenge, he says, and South African lending models are generally geared towards people who either have a strong balance sheet or who have good equity. Investors looking to get a foot into the door need to be out on the road and finding great opportunities.
“Fortunately, there are a number of deals to be had at the moment and many investors are capitalising on this.”
One way for a new investor to get started, Palmer says, is for them to partner with a high net-worth individual. But, as with all business partnerships, there must be a good cultural fit and a common vision and long-term expectations. It is also “paramount” that all the partnership agreements and paperwork are settled.
He says: “Many a successful property portfolio has been built on a ‘find, bind and grind’ partnership. This is where someone puts in the work to find a great deal, the other puts together a great deal and business plan to make the investment work and, finally, the investment is made to do the work (grind).
“In this way, it may even work out that the partner who found the property doesn’t even put money into the deal but rather does all the work required to make the investment profitable.”