 Hello ladies and gentlemen, welcome to the private property whip word whip words episode on how understanding how a property investor thinks I'm really looking forward today to sharing with you just a few thoughts on How a property investor thinks and how they look at property investment now first thing that I would like to share with you is understanding Why properties invest in Indian property and that's a very very Important question to ask and to understand so from a property investors perspective for me There are four main reasons why they invest in property and the first one is Consistent growth if you look at property as an asset class one would see that there has been consistent growth in Property over the last 50 years a second one is economic great economic fundamentals And the important thing to understand here is that property is a basic need ladies and gents and that property that there will always be a need for For housing and for shelter and for people to have a place to stay so because property is a basic need It's very very It's very beneficial to invest in such an asset class also from a supply perspective There's of course limited supply and there's limited space in the country Which is also a great benefit and then you of course have the Opportunity and the benefit to buy property at a discount when property investors buy property They want to buy that property at a good price because they know if they can buy that property below market value It gives great returns for them and then lastly ladies and gentlemen This is probably the most important reason why many property investors are so fond of property as an investment class And that is the fact that property investors can use the banks money They can use leverage ladies and gents so they can they don't have to put all of the money down that they want to Invest they can actually get the greatest portion of it from someone else such as the bank Now one thing very very important ladies and gents to remember when it comes to property investors Is that a good property investor will bold the property portfolio? Like one would bold a business That means they would run this business this property portfolio in an entity of its own with its own bank account and with its own Financial statements so very very important to remember is that when you work with a Property investor as a real estate agent that you understand their need for structures And why they wouldn't necessarily want to put the property in their own name So usually property investors would invest in one of two ways They would either buy their properties directly in a property trust or Alternatively, they would buy the property in a company, but the company's shares will be held in a trust Now you will see in both of these examples that there's actually a trust That there's actually a trust On top of the structure now the reason for that is very very important And I just quickly want to share with you why Trusts in an property investor structure is so important And there's four reasons that I would like to discuss with you the first one is asset protection Property investors use trust so that they can protect their assets better Ideally as a property investor, you don't want to have any assets in your name So you'd rather have all of your asset assets structured within the trust The second reason is for legacy or continuity or estate planning when you pass away If you have a lot of assets on your name, there's a lot of costs being paid estate duties executive fees capital gain stacks Transfer fees so investors would structure their property Portfolios within structures to avoid all of those costs on debt and then two reasons why It is so important not to buy property in your own name But to buy in the structure as explained a property company with their holding stress or a property trust is Because of financing capability when you run your property portfolio like a business in its own entity with its own bank account And its own financials your financing capability that the ability for you to get financing on multiple properties Becomes more possible and that is a very very big reason Why property investors don't like to buy property in their own name and why they shouldn't buy property in their own name And then lastly with the right structure. They are great tax benefits Whether it is in a property trust by using the conduit principle meaning that capital gains and profits can be distributed to beneficiaries Or whether it is that in a company utilizing the lower and tax rate charge Both of those structures are very good structures when it comes to Investing in property now. There are two reasons why property investors invest in In in property and there are two returns that you have as a property investor The one is your capital appreciation and the other one is your cash flow and usually a property investor Would follow one of these two strategies or focus primarily let me rather say on one of these strategies They would either look at capital appreciation or capital growth on the investment Or they would look at the cash flow that this property can generate so As as somebody in the real estate industry or as a real estate agent You need to understand your property investor and why they are investing in property because if you know that you would know How to sell a property to an investor so a property investor that focus primarily on cash flow wants to see good positive cash flow, so they want to see good rental income and positive positive cash flow out of that property from a monthly perspective after the bond payment and the levies and the rates a Property investor that focus on capital growth are not necessarily so concerned about the positive cash flow on a monthly basis But they want properties that show good prospects for capital appreciation and when you as a Real estate agent or somebody in the property industry understand this and understand how a property investor Looks at an investment. You can also sell sell a property beta and give a property investor better information now It is so important to remember ladies and gents that when you invest in property As a property investor, it is about the numbers. It is not About how beautiful the property looks or how the property makes you feel when you walk in it It is all about the numbers and as somebody that is in the real estate In the street, it's critically important for you to understand these numbers and to understand how you To understand how you as a property investor and how our property investor would look at the numbers when it comes to Making a decision so We've discussed the two returns that a property portfolio have On the one side, you've got the capital growth on the other side You haven't have the net rental yield now This is very very important for you to understand you need to know Why as we said a property investors investing in property now We said this cash flow and this a capital growth, right? But an investor's return would be made up out of both of these So when you are selling a property or when you are making a proposal to a property investor on a specific property It's critically important that you can point out to that property Investor what is the capital appreciation or the capital growth look like also? What is the net rental yield look like and we got to discuss those formulas a bit further But have a look at property price growth in South Africa over the last 50 plus years in 1994 the average size property would have cost a few hundred and 175,000 grand that same property today would cost you almost 1.7 million right now Ladies and gents, that's a great selling point when you are telling somebody why they should invest in property If you look at this graph, you will see how consistently property has appreciated over many decades You will also see that property price growth has been very consistent. It hasn't been Up one my year and then down the next year and then up again two years and then down a year after that again Property price have actually consistently increased over time and that's a very good selling point When it comes to speaking to property investors Then if we look at this graph from a different direction, it would look as follows and you would have Yeah, 50 years of data on the year-on-year growth on property prices So you would see that in for example 1981 and also then 2004 that property prices in one year grew with between 30 and 40 percent And then you would also see in the last 50 years There's only three years where property price actually depreciated or decreased and that is in 1985 1986 and then also in 2009 so understanding these figures and Somebody selling property or somebody that's in the real estate industry is critically important And also when you can understand these numbers and communicate these numbers to property investors It will also increase your efficiency and and effectiveness actually as a real estate agent So the very interesting thing about this graph for me is if you take an average Year-on-year growth over the last 50 plus years You are looking at about 10% year-on-year that property has grown now We know that we haven't seen that lately, but it does show you What is possible over a longer period or a longer term in property investors In property investment so then ladies and gents It's very very important to understand the formulas that investors use To look at whether a property is a good investment or not and also to know how to communicate this to property investors remember that we said that and Properties is a numbers game for a property investor and you need to understand the jogger the language that property investors speak when it comes to When when it comes to looking at the numbers and the first formula that I want to speak about today And the formula that you should know off by heart is gross rental yield This is one of the first things that a property investor looks at when they are looking at whether an investment makes sense for them or not and what gross rental yield says is gross rental yields determines a Gross rental yield determines What the annual rental is as a percentage of the purchase price when an investor is planning to purchase that property and a specific price So you would take the monthly rent multiplied by 12 divided by the purchase price and then times by a hundred to get the Percentage now this is very very important to understand when you speak to a property investor that you can tell the property investor The average gross rental yield in this area is 10.5 percent But on this specific property that you are looking at we have a gross rental yield of 12 percent, which means that the Annual rental income is 12 percent of the purchase price. That's a number that is very important For a property investor one can then take it a step further this formula is significantly more important than gross rental yield And that's net rental yield now what rent net rental yield says is what is the properties? Returns from a net perspective after you have deducted the monthly cost now We are talking about costs like agents commissions levies rates in taxes and in some instances people would even Look at maintenance and vacancies as well So the net rental yield would be your rental income less your agents commission less your levies less your rates in taxes less your insurance and Like I say some people even includes maintenance or less maintenance then and that gives you then The average monthly rental after costs Multiply that by 12 to get an annual amount and divide that by the purchase price What a lot of people do is When they want to include vacancies and maintenance into the formula They multiply by 10 by 10 months instead of 12 months and they allocate one month's rental to vacancy And they allocate one month's rental to maintenance and that's also a very good Formula that you can use to explain to a property investor What their return is going to be from a rental perspective? Remember we said that there are two returns There's the capital appreciation and there's the net rental yield, which is the rental income less expenses on an annual basis And that is a percentage of the purchase price. So when you want to speak the jargon that a property investor if you want to Speak the language of property investors and use the jargon that property investors use you would go to an Property investor if you are marketing a property and you want to sell it and you know It's a property investor that wants to buy this property. You can tell you can tell The person sir madam this particular property over the last five or ten years has had a 5% year-on-year capital Appreciation over and above that if you look at the net rental yield of this particular property You are looking at a 7% net rental yield here are the numbers that means your total and geared return is 12% so that is the kind of Language that you want to speak when you work with property investors Then ladies and gents a very very important formula for a property investor when they want to buy a property is Is this property going to put money in my pocket or is it going to take money out of my pocket? And if it takes money out of my pocket, how much money is it going to take out of my pocket and by when? Will I break even now all of that? We discussed under the shortfall formulas and the most important formula here that I want to discuss is Understanding shortfall so shortfall would be your rental income Monthly rental income less your monthly mortgage payment less your levies Lessure rates and taxes Lessure rental commission and that will give you the number that you need to either put in Every month or that you get out of After all of those costs now, that's very very important because remember the one thing that is finite is capital, right? Or available Funds on a monthly basis So the smaller that shortfall is for a property investor the bigger that surplus is for a property investor The better the investor is so when you Present a property to a property investor. You want to be able to tell the person this property has a shortfall of a thousand five hundred random month and Here are the numbers and you would probably break even after four years or five years of investing in this property Or if it's a cash flow property, you would say this property from Year one already has positive cash flow You start with a positive 500 grand cash flow and it will be so much after so many years on a monthly basis when you can Present these numbers to a property investor Immediately you become more effective as a property investor So these are the formulas that we've discussed in we've spoken about gross rental yield net rental yield shortfall shortfall cover percentage and then a more sophisticated Formula that investors use is internal rate of return or get internal rate of return Which we are not going to discuss in detail today But that is also something that you can understand that that you can learn more about then it's very important To understand how property investors look at interest rate interest rates And to keep in mind as a property investor your biggest risk is probably interest rates Think about it if you have multiple properties and interest rates go go up with one percent over a couple of months Think of the effect that that has on that property investors cash flow and on this shortfall the formula that we just discussed and when you can understand interest rates and the trends that we are in and you can You can present that to a property investor and explain to them where we are at what interest rates are Looking like that also makes you more effective as a real estate agent So that is something that's very very important to keep in mind just for interest sake These this is the interest rates over the last 50 years in South Africa And you can see that there were times where interest rates Were low five six seven percent or just over five percent But then there were times where interest rates twice in the last 50 years where we've seen interest rates go up to almost 25% So it's under it's important to understand these trends and to understand How that affects a property investor? I hope that that has been helpful ladies and gents and that you have enjoyed this webinar There's a couple of frequently asked questions that I want to Go through with you that you can also keep in mind when you work with property investors The first question that I want to go through is why is a 30 bond? 30 year bond better than a 20 year bond You would often see that property investors would prefer a 30 year bond over a 20 year bond And the reason for that ladies and gents is it's all about cash flow the better the Monthly cash flow can be on a property the more properties a property investor can own The question I get so often when I present this is but do you know how much interest you are paying and I always joke And I say no, I'm not paying the interest as a property investor My tenant is paying the interest so when it comes to property investment and When you use the bank's money you want to get to break even a positive cash flow as quickly as possible Because when you are in such a position the number of properties that you can own in your property portfolio is Significantly bigger. So That being kept in mind Property investors should always go for a 30 year bond rather than a 20 year bond then another question that I have here is Should a property investor buy property in their own name or should they own it in a structure such as a trust or a Company and as I explained in this where we know it's it's critically important as a property investor To run your property portfolio like a business this will enable you to get more financing over the long run In other words balding a bigger property portfolio having no assets protected better having less costs on death one day when you pass away and also having Less taxes that you pay and when this is structured correctly So you want to own your properties as a property investor either in the property trust or the property company With a holding struts or holding struts holding the shares in that portfolio Then and something where we spoke about interest rates How do how does an investor hedge themself against an increase in interest rates? And there are two ways that you can do that one is to have a reserve fund a healthy reserve fund So when you speak to property investors to remind them that they put some money away In the access bond if they want to that they can use in the case of interest rates Increasing the other alternative is of course to fix your interest rates And that may be a question that you get very often and although Fixing interest rates can give you peace of mind. It usually comes at quite a premium and that cost Obviously needs to be considered then So a question that I very often get is where do property investors find properties at a discount and this is where it's very important as a real estate agent when you know that a seller is distressed and That or that a seller needs to sell quickly That you know how to sell that to a property investor as well By saying listen, this is a property that needs to sell quickly It usually would sell for 900,000 grand But the sellers indicated that they would be happy to buy this property at 800,000 grand So you are gonna set by this property below market value and use that as a technique to Make a property investor or to inform a property investor that this property is actually being sold and it is count and then A question that I very very often get is when it comes to Renovations of the border property how much or how little should you renovate and the thing that I always advise property investors is Make sure that you look at what other properties in that area selling for that you don't overcap Lights on the property when you've bought a property for significantly less than other properties in the areas you've got capacity to renovate and improve that property and That can of course add value to your investment and increase your returns as well And then last question that I want to discuss with you and this is something that when you can guide a property investor with Where you can build up a lot of trust and the that is where do I start to build up my property investment team And who should be in that team now? Obviously, we know in that team should be a real estate agent somebody like yourself that can bring Great investment properties to the property investor But then that person also need a structuring specialist that can help with the structuring it an accountant that can help with the accounting of those entities a Ponder originator or a banker that can help with the financing a Convancing attorney that can help with the transfers and also maybe a commercial attorney with more sophisticated Property transaction you of course need Maintenance people in your team that can help with maintenance and repairs on a spot to kill a property and all of those are property investment team members that you can suggest for a property investor and as as a all of these are Team members that you can recommend to a property investor that can help them both the property portfolio Ladies and gents, it's been lovely being by you, and I hope that you enjoyed this private property webwords episode and I wish you a very very good day, and thank you very much for joining