Investing in property is an opportunity for young adults to build future wealth and offers a tangible asset. The younger they start, the better the returns and they are more likely to purchase multiple properties if they start early.
Encouraging your child to invest in property is a valuable gift and a great way to introduce them to the benefits of a diversified portfolio. A young adult has more flexibility, fewer commitments and can take more risks as time is in their favour.
Here is some advice from Bradd Bendall, Group Sales Director at Carrick, to share with your young adults if they’re venturing into property.
- Explain the mindset needed to buy an investment property as opposed to a first home. A home is an emotional purchase, while an income-producing property is all about its value and its potential for gains and capital appreciation.
- Understand what the objective is. Is this a long term plan? Be aware of other costs so that you don’t over-capitalise: Are you able to service the property? If you buy the worst property in the best area, are you able to renovate over a reasonable period? How much strain is that going to put on your cash flow?
- Buy-to-let is an attractive investment, especially in time of low rates.
- Do sufficient research. Ensure that you’re not overpaying and remember there are no short-term gains in property. Property is a hard asset and requires a long-term commitment.
- Understand the ebbs and flows of property market. “By nature the property market in South Africa, for example, has a seven year cycle. If you go back 50 or 60 years, it’s quite clear that there have been anomalies,” explains Bendall. “The 2008 financial crisis affected the market. COVID-19 is certainly affecting the market. And then you get into outliers. For example, the Western Cape unhinged from the rest of the property market in SA and we saw ridiculous increases in prices. Those who purchased there four or five years ago are now paying the price because they paid unrealistic prices.”
- From a South African perspective, the golden rule is location, location, location. You want both your capital and rental values to increase over the years.
- The most important thing is to take your time, especially if it’s your first property. “It’s really important to do your homework.”, says Bendall
- If you’re buying abroad, make sure that you’re dealing with a reputable company. “Ensure the investment case is sound and only go with a vetted rental agent. Consider all the different anomalies in the purchase of that property and get solid legal advice,” advises Bendall.
- When it comes to offshore investment, don't be scared to invest in tertiary areas, says Bendall. “Not everybody has the budget for property in London for their first investment, for example, but there are other areas within the UK that will produce fantastic returns.”
- “The affordability of offshore real estate opportunity is one of its most marketable components, as is securing a good rental,” says Bendall. “To be in a market where you can borrow money close to 0% is completely foreign to Africans, but once they consider it, they can see the how well the cash flow can work in their favour.”
- Explain to your children that while they may be considering property now, real estate should ideally be part of a holistic, integrated financial planning model.
- Finally, nothing beats professional advice. “The right advice is providing a diversified portfolio of assets in which the property component complements the fixed interest and equity-based investments,” says Bendall. “We need to establish where the client is today, where they want to be tomorrow and what the best way is of achieving this.”