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Our buying/investing decisions are normally influenced by how the markets are looking, and in property investing, this should not be the case
Over the last century, property values have gone up and down but have pretty much kept ahead of inflation. The simple explanation is that demand for housing is growing in line with our population, and expansion of the economy (GDP).
New homes are built when the cost of construction and land is cheaper than what second-hand houses are selling for. If demand exceeds supply, prices rise above inflation and developers, speculators, bakkie builders, slum lords, and the like spring into action. Supply of new houses floods the market in the categories where the price differential is the largest until there is oversupply. Then, the price deflates till the creators of new homes go back into hibernation.
When buying, consider what would it cost you to build a similar home, including the land and all fees in your chosen area. If the second-hand house is cheaper or has far better value for money, then you are probably on the right path and the house prices are running below inflation. So, there is a high probability that the price will increase in the future to correct.
So in conclusion, decide what your minimum target ROI is. If you have cash in the bank and are earning say 6%, and paying tax on that, and you want to reinvest that capital in a property then find property where the nett rental income (the rental income less your direct expenses) is equal to or more than 6%. If it is, then the next step is consider the rental opportunity and risk. Is the area dying or growing?
If there is good growth underpinning the area, jobs, schools, new roads, then the chance of replacing existing tenants is good, then you are done with the next step. Remember that this is your cash on cash return. But what’s different from cash in the bank is that instead of just getting you a monthly rental return of 6%, the property is also increasing in value.
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