Housing market: to rent or to buy?

The South African population, according to Stats SA, is currently estimated at 60.6 million people and we are growing at a rate which is higher than our mortality rate. That being said housing and sustainable housing is a going to be an ever growing sector, which our government is working on actively, in an attempt to curb our levels or inequality which is the highest in the world.

Given what is being said above, what choices are available to those who have the option to invest in something for the purposes of wealth building and long-term investment? Rental income is one answer to this and the other is a property portfolio wherein the development of housing is the aim.

Rental income is a great way to convert the availability of credit on an asset basis. By this I mean leveraging your credit (taking a loan) and getting an income generating asset. Many people work on this basis acquiring houses, keeping up with consistent payments with the money of the tenant and repeating the process. The most important factors to keep in mind with this approach are the term of your leases in respect to the term of the loan; the lifestyle of the tenant - as a young, single, male tenant is seen often and commonly as a higher risk; the amount that tenants are being charged in respect to the minimum monthly payments; and most importantly of all the area in which the property is located as the long-term value of the property will need to give the investor a gain in respect to the loan rather than ending up holding a property which is going to depreciate, lose the appeal to the market, the value of the income in respect to the rent and the loan. Other versions of the strategy exist where one hedges against this by not needing a loan in the first place and renting out a property which the investor already owns on a shorter term basis - like Air BnB - or the investor goes directly to portfolios which they can by a share of, own a share of and earn a share of the rental income after all the maintenance and other operating expenses have been handled.

Buying property is not that far off from the rental strategy, except that the property in and of itself is the end. The investor in this case is not looking to gain an income, but rather to gain the value of the property and the expected growth is what they are trying to bank. Some instances of this are flipping property, developing property and selling property. Flipping property is a process driven value add technique where a low-cost or undervalued property is purchased, sometimes renovated, and resold at a price high enough to turn a profit. This method is most useful to individuals who have access to cash surpluses and who have spotted properties in areas that are on the rise, undervalued or historically significant but unprotected. The development outlook involves much more intensive investment and extensive research. This one differs in that the plot of land is bought for a certain amount, the lot is subdivided and planning approval is obtained for the development of the property and the apartments/townhouses/freestanding houses planned are sold as a final product or in process. This method takes value from developing the land from scratch and off-setting this with the gains they cover operating expenses. Many of the buildings are bought and sold numerous times before they have reached completion and there is space for other property speculators to make some money in that process as well. Some buy in near the later stages and then charge rental fees to achieve the rental strategy. The final strategy involves buying and selling property without actually taking possession of the property. The investor makes an offer on a property, holds it for less than three months then resells the property to another buyer, in doing this they avoid the cost of gaining the property and maintaining the property and charge a marginal amount to cover their own costs and mark up.

Property is also very sensitive with respect to fees, levies and market fluctuations. The investor should do their market research and gain as much insight into the market as possible and have strategies in place for events such as the housing bubble which we saw in 2008 where the market was plagued by rampant loans which over stimulated the market, 2019 where quarantine turned many student towns into ghost towns and had many people stuck with tenant however they had no income from those tenants. Disaster planning is key because only through research could you know that Centurion floods, or is built on Dolomite in some areas and Kwa-Zulu Natal has unexpected subsidence events which can make whole houses disappear. Not researching could leave you out of the upside as well, you could sell a property in Lanseria, however, find out later that a smart city is planned and that you gave up a potential 100% profit if you held the property or rented it out instead.