Property Investment as a Strategy for Wealth Creation
Property Investment as a Strategy for WEALTH CREATION by
What Is Property? The word “property” means different things to different people. There is a distinction between personal property and real property. Personal property includes tangible things such as goods and chattels. It also includes certain intangible or ‘incorporeal’ legal rights, also known in law as ‘choices in action’, such as copyright and other intellectual property rights, shares in a corporation, beneficial rights in trust property, rights in superannuation and employment pension. Real property involves interests in land and fixtures or structures upon the land. Intangible rights are created by law. Tangible things exist independently of law but law determines the rights of ownership, possession and use. Human beings are not property. When a man pays roora/lobola/bride price he does not acquire any property rights over the woman. In Yanner v Eaton, the High Court of Australia stated that ‘property does not refer to a thing; it is a description of a legal relationship with a thing. It refers to a degree of power that is recognised in law as power permissibly exercised over the thing. The concept of ‘property’ may be elusive. Usually, it is treated as a ‘bundle of rights’. The property has to be recognised by others so that they can respect the rights therein. That recognition comes at a price: the cost of property. Unless one is a hereditary landlord, every real property has to be acquired. There is someone who is willing to sell the property and there is someone willing to buy that property. And because the property is attached to the land, the increase in the world population results in more demand for land and the land value increases. The cost of land keeps going up. That is the reason why many people are willing to pay for 25 or 30 years to earn the right to possess, occupy or sell a property. But is it not sad? History tells us that land is the most expensive commodity that one can buy. Even if one buys
the land, there is always government and local authorities to contend with. Just because it is yours does not mean that you can do whatever you want with it. Being in the diaspora makes it difficult to raise the necessary deposits to pay for the purchase price of the property. What Is Property Investment? Property investment is a complex issue. I will focus just on the rudiments. In every country, the law defines what property investment is, and what it is not. Each definition enables the government to impose various taxes and levies when the property is sold or acquired. In some countries and states, the levy and taxes on land raise a large amount of revenue for the government to the extent that if there was a decline in the number of property transactions done annually there would be a significant impact on the economy as a whole. So before deciding whether to go into property investments it is important to know and understand the applicable laws wherever you want to buy the property. Many people in the diaspora are faced with a dilemma whether to buy, when to buy and where to buy the property. There are different benefits and disadvantages wherever the investment is made. I just want to point out some of the obvious and the obscure reasons that make property investment attractive. The main advantage of investing in properties is that it creates wealth which is not always proportional to the input. The appreciation of value and capital gain makes property attractive. This can help create financial freedom. This can be achieved through 3 different strategies. The strategies are (a) Capital Growth Strategy; (b) Cash Flow Strategy, and (c) Renovation. Capital Growth Strategy involves buying a property hoping and anticipating the future increase in value. That increase in value will be the capital gain when the property is sold on. The Cash Flow Strategy is where cash flow is the
11 priority. This includes strategies such as renting out the properties. Renovation Strategy involves buying a property, doing work on the property to improve it, making extensions and expansions, making new fittings and features and then resale the property at a high price. The renovated property can also be rented out bringing in the income in the form of rent. The main benefits of property investment are (a) Security of Tenure: the right to exclusive possession and occupation (b) Capital Gain, Appreciation In Market Value: natural gain without direct work (c) Huge Return to Invested Capital: demand can stimulate huge increases in value (d)Cash Flow: Property can pay for itself leaving extra income for the landlord (e) Home Improvement: can design and erect features and fitting as you desire (f)Wealth Creation: an appreciation of value thereby creating capital gains (g) Legacy when the property is inherited: your children will have a good start in life and inherit the wealth created. The main disadvantages and risks associated with property investment include (a) These are long term investments that tie in the capital (b) The building depreciates in value and (c) When the property market goes down there might be big losses As Zimbabweans resident in the diaspora, we have access to the property market where we live. We can build the credit scores required to access home loans. There are some strategies for buying properties that do not require cash deposits. It is worthwhile working with brokers and accredited financial advisors and check whether you can also benefit from property investment. Personal circumstances are taken into consideration when applying for finances. Another method of raising capital that might be available is the use of property investment clubs. That involves individuals pooling their resources together and purchasing buildings that can be leased at commercial rates. Properties in Zimbabwe are still relatively cheap. There are fewer restrictions and covenants to contend with when building. It is worthwhile to consider your investment options as there are companies that can supervise the construction thereby reducing the risk of being duped out. Everything about the property has to be lawful as you would want others to respect your bundle of rights. Avoid illegal structures and illegal work. Property clubs can also work in Zimbabwe. Honesty individuals come together to pool their resources and increase their purchase power. In the Asian sub-continent people have been using property clubs to get on the property ladder. It is noticeable that in some cities there are large swathes of land purchased by people from a certain culture. Further investigation shows by and large these individuals operate a property club. That is why some people with low paying jobs end up becoming multi-millionaires on the back of property investments. Risk Management There are many property developers who promise of quick construction, strong capital growth and healthy rental yields. Some of these developers go bankrupt and the investors lose out. Many a time the price of the land is inflated. This price of the land is influenced by future developments such as a rail line, construction of a shopping complex among others. If these big projects fail to take off, the investor may be lumbered with an overpriced piece of land that they will be forced to sell off at a discount. It is therefore important to raise a huge deposit before purchasing an investment property. There are many financiers willing to fund building projects but that comes at a cost. If you raise a bigger chunk for the deposit then you will fare well when negotiating the interest rate with the financing corporation. It is important to do a thorough research of the companies involved in the project or development. Do not rely on word of mouth. There are some companies with a good track record of delivering. There are also some companies out to make a quick dollar. Be wise. Do not be fooled by scammers. Avoid buying a property on sentiment. Life is not about competition. Just because someone brags about how well they are doing with a certain investment does not mean you will do equally well when you do a similar investment. While it is important to learn from others, it is rather unwise to be a copycat. What works for Peter does not necessarily work for Paul, but try to understand the concept behind the success. That is what is essential to grasp and apply to your own situation and circumstances. Conclusion Property investment is an attractive route to create wealth. The risk involved needs to be carefully managed. Perform due diligence and carry out research into the history of the companies involved. Enlist the services of accredited financial advisors, estate agents and lawyers to ensure you don’t by a dummy. Exercise some financial discipline. Make sure you get a good mentor that can guide you and they are willing to give you their time. My first property mentor told me to make money work for me and never to work for money. I have since figured out what it means. I hope you do as well. NB - This opinion was written in a personal capacity and does not constitute legal or financial advice.