Many South Africans aspire to homeownership because they want to have a piece of land that they can call their own, an asset that they know will appreciate in value and provide them with a foundation for financial security.
But Adrian Goslett, CEO of RE/MAX of Southern Africa, says that while a owning a property is considered to be an asset – is every home a true asset?
“If you read the dictionary definition of the word ‘asset’, it would describe it is any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Well, that may be the definition of the word, but what is a true asset? Is it something that sits on the bottom line of your balance sheet or is it something more?” asks Goslett. “The real determining factor of what makes a true asset is something that generates an income in excess of the expenses it takes to retain it. While real estate investment can be that asset, just remember to make your money when you buy it and not when you sell it.”
Goslett advises that when it comes to property investment, the golden rule is to always purchase a property that represents good value. “Although this means that the process of buying a property may take a lot more time and research, there are still excellent opportunities available to property buyers with access to finance. Buying a property that offers good value for money will mean that buyers are already ahead of the curve and won’t have to wait for the next boom to see any real capital appreciation in the property’s value,” says Goslett.
According to Goslett, in order to determine whether a property is a true asset, the buyer will first need to work out whether the costs of maintaining the property and paying the monthly expenses are less than the income generated by the said property. The operational income, which is the rental amount minus tax, should outweigh the total monthly cost of owning the property. The profit generated from this true asset, if managed correctly, can then be used to save up or purchase the next true asset. He notes that this is of course referring to a property that is bought as an investment and not as a primary residence.
“Although a primary residence will not generate an income and does have a number of maintenance costs and running expenses, it can also be a good asset that benefits from capital appreciation in the future. Even if a property doesn’t appreciate in value over the short to medium term, it will definitely outstrip most other investment vehicles over the long term and provide a solid foundation for wealth creation. However, the same principle would apply of purchasing a home that is available at a fair market-related value. There is also the vital aspect of purchasing within a good location that is close to amenities and good schools,” says Goslett.
He concludes by saying that purchasing the right property can provide the owner with more than just an asset, but more importantly a true asset that outperforms other financial vehicles and provides a solid return on investment.