“Do you know what percentage of people in South Africa will retire rich at the age of 65?”
“Do you know how many people will either be poor, reliant on the government or still working at 65?”
“Would you like to be wealthy, financially independent or financially free?”
Well unfortunately the statistics are not in your favour. Only 1% of people retire rich at 65 and 94% are poor, reliant on the government or still working. The other 5% are financially independent which is described when you retire with 75% earnings of your last pay slip.
Basically you get 25% poorer and you are financially independent. That makes no sense to me.
“Based on these very bad statistics, my dad being an employee, having a pension and yet broke at retirement and the fact that 49% of the world’s wealth is held in property, I decided to master property at a young age and be in control of my own destiny. I read everything I could and attended as many presentations as I could find and then I bought my first property at the age of 23."
"Since then I have never looked back, building a property portfolio in South Africa and this then enabled me to start my own business at the age of 29. My wife and I where able to retire at age 38. Let me share with you 5 of the 7 laws of creating wealth through property.”
Law One – Invest in yourself first
Do you know what the definition of ignorance is? It is the difference between truth and perception. Basically 99% of people don’t retire wealthy or rich, because they listen to all the stories their friends and family tell them. They listen to newspapers, live in fear and because they don’t understand the fundamentals, they are scared to take action.
Very few people (actually 1%), take the time to find out the truth so that they understand how to measure the risks and returns, understand property fundamentals and thus can make educated and informed decisions.
Three books I would highly recommend to understanding wealth and property are:
- “Rich Dad, Poor Dad” Robert Kiyosaki
Explains the difference between working in a job, versus investing in assets like property (your home is not an asset) and starting a business.
- “Real Estate Riches” Dolf DeRoos
The first book I read on property which explains the principles of property and gave me the confidence to get started.
Many people believe that knowledge is power, but they are wrong. There are plenty of professors worldwide who are poor. It is informed knowledge which is power. As Napoleon (one of the greatest generals in history) said, “The right information at the right time is nine tenths of any battle!”
However once you have invested in yourself, the greatest investment you can make, you ultimately need to take action. You need to realize you will make mistakes, but you can’t learn properly until you get started. No-one ever learnt to swim or ride a bicycle by reading a book! A final word on this is the lesson my Uncle taught me when I was young.
With any investment, work out what the worst case scenario is and if you can manage that, then everything else is upside and you can proceed. But don’t take risks you can’t manage, as they can sink you, permanently!
- As investing in yourself is so important we have a number of investment reports and free downloads on our website www.wealthsolutions.za.org. that can help you fast track your investment career.
Law Two –Always buy at the right price
Make sure you compare apples with apples and that there is potential for growth on your property. Location location location is not normally the answer for a property investor looking for high returns in a relative short period of time.
Do your homework and find out what is happening in the area you want to buy in, is there any potential of new development in the area and close to the property your interested in-this can have a massive impact on your growth, was there any new development in the last 5-10 years and how is that doing, is there enough people to rent my property, will I get a high enough rental income to make a good return, these are all questions you should ask. When doing your homework and buying at the right price you will always be in the best position, no matter what the markets does.
Whichever property type you buy into, be it Commercial, residential, warehousing, student accommodation or any other property class, be sure you know the facts. The less information a Seller, agent or property developer gives you about the area the more you should get. If the seller did not do their homework you should do it.
Always look at trends with other similar property in other areas, if there is a trend near new shopping centre’s for residential rent to grow faster and property growth in the area to normally have higher returns and you know of a new shopping centre coming up or a new development in the area that can make your property grow faster, go for it.
The highest returns that I saw investors making on property was when an investor bought at a reduced price in the beginning of a new development that had a twist with another new development in the area close to where he bought.
Look out for opportunities like that and move quick without hesitation when they come along, cause you will need to buy much less properties to grow your portfolio massively that way
Law Three – “Always do the financial analysis before one buys!”
Most people buy property on their “gut” feel and most people retire poor. Sophisticated and wealthy investors run the numbers and make decisions based on the financial facts and the returns the investment can generate. With an understanding of the numbers they can also calculate the risks and make sure that they can manage them.
Make sure that you understand how the mortgages work and how much the monthly payments will be, even if interest rates do go up. Calculate how much you can afford and what the bank will be prepared to lend you.
Understand how to calculate risk and then manage it under various scenarios and most importantly, understand how to use the bank to protect yourself and your property investments.
Understand all the costs involved, not just the deposit, but the lawyer’s fees, transfer fees and all the other ancillary costs which are included. Please don’t forget about maintenance, voids, tax, body corporate fees, rates and taxes, water and electricity, etc.
Once you have all the numbers, you can take the emotion out of purchasing and use the numbers to decide which the best investment for you is.
Law Four – “Look at cash flow first, then capital appreciation!”
When deciding what type of property to buy, the focus must first be placed on the income that the investment property will generate and only then on the potential capital gains.
Your primary focus as an investor should be on the investment’s suitability as a source of rental income, rather than its potential to deliver a quick capital gain from a short-term rise in the property market.
Generally speaking, where the majority, or all, of your property investments are financed, regular monthly contributions will be required until such time as the rental income exceeds the bond repayments and other costs.
Other costs could include expenses such as rates and taxes, property insurance, maintenance and repairs. By focusing on the cash flow first you will ensure that your investment will break even sooner than if you were focusing exclusively on capital gains.
The surest way to lose your property is by getting the cash flow wrong. Provided you get the cash flow right, property can – over time – forgive almost every other mistake that you may make.
Gearing (borrowings, such as a mortgage bond) is at the heart of property investment risk. High gearing now means more purchases now and more income later.
But what it also means is more chance of losing everything. If you’re young, eager and ready for risk, high gearing is fine, provided you know when to go for it and when to wait and consider your options. But, if you’re older and/or risk averse, lower gearing will be more appropriate.
A helpful tip when deciding on your appetite for cash flow risk is to do some scenario planning. This is achieved through running “what if” cash flows. The starting point is to determine the likely rental, as well as monthly costs that the investment property will incur.
These will include your gearing level and the cost of servicing the bond, maintenance costs, rates and taxes, levies, and any other expenses that may be applicable.
Then play around with various scenarios. For example, increase the interest rate, escalate operating costs, make provision for maintenance expenses, and make allowances for vacancies. This is to ensure that you will have the cash flow to cover these eventualities.
Many speculative investors were swept up in the emotion of the boom times, and ended up being burnt. They over-geared and when the property market and interest rates turned, they lost their properties. It is a key rule of property investment that the investment must generate sufficient cash flow over the short to medium term to cover operating costs.
In the past 7 years since the GFC, we have all learnt huge lessons in property. From the biggest property funds in the world to the individual investors, those who focused on capital growth only, have died financially.
There are many people in South Africa and around the world who “teach” property and yet their whole philosophy is based on capital growth.
Capital growth is something you can’t control and as sure as night will follow day, at some point the market will turn. And when it turns there will be plenty of blood on the streets with all the naive investors who didn’t have a plan B. Those “teachers’” strategies have fallen apart and left their students bankrupt.
It is actually in the tough times that true investors make their best returns. The reason is that they invest in property based on the income.
What income can the property generate and as long as the property makes sense from an income perspective, then they are prepared to invest. If the market goes up or down they don’t mind as the property continues to pay the income and so true investors can ride the storm.
Then, based on their cash returns they are generating from their properties, they are in a strong position to buy properties from the motivated sellers, who bet against winter by only focusing on capital growth and winter arrives.
There is a saying in property, “The best time to make money is when there is blood on the streets.” As Warren Buffett says, “Be fearful when others are greedy and be greedy when others are fearful.”
I have a personal example to explain. In 2003 I bought my first house in South Africa. Although all my friends were telling stories about how the SA economy was going down, the oil prices were going to go up and therefore inflation and interest rates were going to rise, I decided to focus on the investment.
I found a property where the rent covered the bond. The property has been cash flow positive since day one. While all my friends were scared, they did nothing.
Sure it was really tough, but from 2003 to 2008, the property grew in value from R270 000 to R750 000. But the really exciting thing was it was generating a couple of hundred Rand per month, net after the costs. Then at the end of 2008, the GFC hit and the market collapsed.
People all asked me if I was concerned as the property lost probably R100 000 in value. However I was over the moon! The Banks reduced interest rates. I was on base minus 2%. My rent was over R5000 per month and so it was generating revenue or income for me.
That property is worth over R900000 today and I own a couple of them in the same area. I hope the GFC continues forever and only wish I owned hundreds of properties like these.
Through Wealth Solutions I deal with many sophisticated high net-worth individuals and anyone who creates significant wealth through property only focuses on income to value a property and decide on the investments potential (residential or commercial). If you buy the right property in markets where the fundamentals are right, capital growth will come as a bonus.
The final word on this is, you have to really do your research on the tenant demand and where the income is going to come from. You cannot rely on sales people or estate agents and you need to be sure that the demand for rentals is available. The more secure you are about the income, the less risk is involved in purchasing the property.
Law Five – “Property is secured in law, but it is relationships which bring in the money!”
Like anything in life, it is your network and relationships which will really help you build your wealth. This does not mean what school you went to or your dad’s friends, but how you go out and build relationships with the right people.
You need to find the Best of Breed partners and work with them as they are experts in a particular niche of the market.
Depending on the strength of your relationships, you will often be given opportunities from motivated sellers which do not even come onto the market. If people can trust you, then you will be amazed what comes to you.
Do your research, find out who the genuine players are and then start to build relationships by adding value to them. Often when you start out you don’t have the money but you have time.
I believe there is plenty of money for good deals and so what you need to focus on is building relationships with the right people and then bringing them great deals.
It is only a matter of time until you are building great momentum, just as Warren Buffett explains in his book, “Snowball” and how he created his wealth.
After investing in yourself, your next most significant investment is in your network. Build relationships with estate agents, brokers, developers, bankers, management agents, lawyers and successful property investors.
This is a law of nature, that we all achieve more when we work together. A bird flying in a flock of 25 birds can fly 70% further than a bird flying on their own.
Focus on building your network and your team. Who can help you achieve your objectives? I leave you with one thought which is the motto we built Wealth Solutions upon:
“You can have anything you want in life, if you help enough other people get what they want.” Zig Ziglar
In conclusion as Tony Robbins, the world renowned expert on getting results and billionaire said, “Your destiny is determined by the action you take.”
You now have a foundation of information you need to help you create all the wealth you want. The results will be down to you and the actions you take.
Follow the first five laws of property and then when you are ready, invest in yourself with the relevant courses and you can learn the remaining two laws which will ensure you ultimate success! Your destiny is now in your hands and it is now your responsibility!
Enjoy, have fun and live the life you have dreamed of!