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 Ten-point checklist for prospective property investors

 

 The current economic environment in South Africa poses both opportunities and dangers for business owners who want to buy investment properties, says Stanton Naidoo, property management COO at Business Partners Limited.

On the plus side, the recent slowdown of the rise of property prices as well as a lower-interest rate outlook for the economy has turned the market in favour of buyers, but the downside is that the distressed economy comes with increasing numbers of distressed tenants and lots of uncertainty about the future value of investment properties.

Naidoo has drawn up the following checklist for prospective buyers to help them find good investments while minimising the risks.

1. Location

No surprise that location is top of the checklist - it is, as always, the key factor in property investment. In tough economic times such as these, it becomes even more important, because certain areas are hit much worse than others in an economic downturn.

Unless you want to serve a very specific business purpose, avoid investment in rural towns as they bear the brunt of the economic downturn. Property values in metropolitan areas are much more resilient to economic fluctuations because of the proximity and the size of the market. Affluent and well-established areas in the metropolitan centres are the safest bet.

2. Affordability

Make sure that you have worked out carefully what you can afford in terms of ownership of the property. The biggest mistake that inexperienced property investors make is to fixate on the bond-repayment figure only, while rates, levies, utilities, maintenance and security costs all have to be factored in.

It is also very important to test various scenarios to see if the investment is still affordable when interest rates or other costs rise.

Remember not to take the municipal rates that the previous owner has been paying as a given. The municipality will adjust the rates according to the sales price as you register the purchase of the property.

3. Deposit

The bigger the deposit you can put down, the lower your bond repayments will be, but for business owners this can be a difficult calculation, because they must consider the opportunity cost of taking the cash for the deposit out of the business.

You might be able to get a bigger return by keeping the money in your business than the savings gained from having a bigger deposit.

4. The cost and supply of utilities

Electricity and water, once a given in nearly all formal properties in South Africa, is no longer to be taken for granted. Do a careful study of the reliability of the supply, its costs, and the availability of backup systems.

5. The cost of maintenance

It is easy to underestimate the cost of maintenance, especially in old building that you might think you are picking up for a bargain. Be sure to do a proper survey of the state of the building.

6. The cost of security

You might have to invest a large once-off installation such as an electric fence, or add in the ongoing cost of around-the-clock security if the area turns out to be vulnerable to crime.

7. Access

Whether or not you are going to use the building yourself or rent it out, ease of access can be key to making it a worthwhile investment. You need to look not only at issues such as road infrastructure, but also parking, congestion, and the proximity of public transport. 

8. Defects

Working out the ongoing maintenance of a building is one thing, but ensuring that there are no hidden defects in the property is another that must not be neglected.

Make a careful study of the water and electricity connections to the property, the state of the building itself, the infrastructure such as air conditioning, and nowadays, the fibre connections and cellphone coverage.

9. Approved building plans

Many investors have burnt their fingers by buying a property, only to be slapped with a demolition order because the seller had built without the requisite approval. It is well worth the while to get hold of the approved building plans of the property before you buy.

10. Sectional title

If your investment is part of a sectional-title scheme, it adds another layer of due diligence that you have to do. Make sure that the body corporate that runs the complex is well managed and healthy. A good place to start is by requesting to view the financials of the body corporate.

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