My type of property

By Coert Coetzee

I received a lot of response after my recent article about the perfect property. Quite a few people were taken aback that I didn't write good things about their type of property. Some were concerned, and a few were downright aggressive. Some of the responses I received were along the lines of, “How dare you run down houses outside of security complexes?” and so on.

I also recently received a message from one of our members, asking advice about his portfolio. At the beginning of his message he made it clear that he owns 15 TREOC-type flats. Hold on a moment! There’s no such thing as a TREOC-type flat, because a flat is not a TREOC-type property.

I've been saying it for the past five years at every seminar and now I'm going to put it in writing: a TREOC-type property is an entry-level townhouse in a security complex, and that’s it.

Does that mean that I'm saying all other property is bad or of lesser value? No, certainly not. I myself own a number of properties that are not the typical TREOC property, which is incidentally how I know that these properties don’t work with the TREOC refinancing model. The fact that they aren’t suited for the TREOC refinancing model doesn’t mean that they aren’t good investments, though.

For the TREOC refinancing model we need two essential criteria to be met:

• sustainable, constant capital growth and
  
• above-average rental demand

Only entry-level townhouses in security complexes fulfil the above criteria. On the seminars I deal fully with my reasons for saying so, and I'm not going to go into those now, but the fact of the matter is that we can rely on this being true for many more years in South Africa.

Many of our members buy flats, and as I have already mentioned, some members think they are "TREOC-type flats"! Those of you who have attended my seminars may remember that I sometimes say that purchasing a flat can be the ideal stepping-stone, particularly for young people just getting started in the market. It is cheaper and easier to buy a flat, but it is also a higher risk with lower returns. Be very careful if you buy flats, because some apartment blocks are very badly managed. Also, drug lords are in control at certain blocks, and they could intimidate your tenants, which may lead to you never receiving a cent of rental. The capital growth on apartment blocks is mostly very low and unstable. Apartment blocks are also usually in dangerous areas, making it difficult to manage them.

Don't make life complicated for yourself. Stick to the easy method of entry-level townhouses in security complexes. Property investment is supposed to simplify your life, not complicate it. If you really want to buy flats, I recommend that rather than buying single apartments, you buy the whole block. I own a couple of apartment blocks and I make use entirely of property managers. If you do it this way, it’s easy and relatively problem-free, but townhouses still remain the best.

Let’s look at another type of property that is certainly also not a TREOC-type property, but is a very good investment – properties in golf estates. I own a few of these properties, and they are excellent performers in terms of capital growth. Unfortunately they don't perform too well with regard to rental, because good tenants in the top part of the market are very scarce. Despite the fact that they aren’t easy to rent out, they are still good in terms of capital growth. The main reason for this is that the government has placed a kind of moratorium on new golf developments. So the supply is fixed, and insatiable demand causes the values to rise continually. This type of property is a good investment, but is totally unsuitable for the TREOC refinancing model, due to its unpredictable and unstable rentability. This is the type of property that you would preferably buy with the cash proceeds from your TREOC townhouses.

In conclusion: there is no such thing as a bad property investment or bad type of property. It’s just that my type of property – entry-level townhouses in security complexes – performs better than any other type of property. Nevertheless, if you own any other type of property you are still light-years ahead of someone who owns no property!

Happy House Hunting!