10 SCORECARD VARIABLES
FINANCE
Choosing the Right
Investment Property
Evaluating the break-even and condition
BY GERT VAN STADEN
Selecting the right investment properties is fundamental to the success of your property investment success . If you choose the right property , you can be almost assured that you will enjoy good capital growth for many years , and that the property will rarely - if ever - be vacant , which will practically guarantee your property investment success .
For this reason , we have come up with a 10-point Scorecard to evaluate each potential investment property before making an investment decision . In this article we look at the break-even point in the investment , as well as the condition of the property as important variables in your property investment success .
Break-even It is certainly possible to find cash-flow positive properties ie buy-to-let properties that immediately generate sufficient rental income to not only cover all the property expenses but also produce a surplus . However , most investment properties will initially have a monthly shortfall : the amount by which the property expenses exceed the monthly rental income and which must be funded by the property investor . This monthly shortfall reduces year after year as the rental income increases until the break-even point is reached ie the point at which the rental income covers all the expenses and produces a surplus .
Understanding exactly when break-even point will be reached and how much the shortfalls will amount to are crucial investment factors . So how long and how much is acceptable ? The answer is : it depends . This is because the break-even point is a dynamic factor that fluctuates with the interest rates and the level of market-related rentals . For this reason , P3 Investment Group members use custom-designed software that
allows them to look into the future and determine whether the break-even point and the out-of-pocket investment in covering the shortfalls are acceptable given the return on the investment .
Condition of the property The condition of the property is an important variable as it affects the rentability of the property , the rental obtainable and the maintenance costs . The older a building , the more maintenance may be required . Second hand investment properties should be inspected by a NACHI ( National Association of Certified Home Inspectors ) registered property inspector , who will provide a report detailing defects , repairs and maintenance issues , the cost of attending to these , as well as the estimated cost on ongoing maintenance required , to guide the investor ’ s buying decision . These costs can then be factored into the cash flow projections using advanced software to determine the impact thereof on the return on investment , allowing investors to make informed decisions about the viability of the investment .
10 SCORECARD VARIABLES
1 . Price 2 . Rental income 3 . Break-even 4 . Condition of the property 5 . Vacancy 6 . Area 7 . Levies and taxes 8 . Affordability 9 . Control 10 . Bank valuation
RESOURCES
P3 Investment Group
24 AUGUST 2016 SA Real Estate Investor www . reimag . co . za