Warning to South Africans buying property

Buying property is a significant financial decision and a high-risk investment that requires careful planning, realistic budgeting beyond what the bank offers, and a clear understanding of additional costs and risks.

Sinenhlanhla Sithomo, head of insurance business at Investec Life, explained that property, like any other big purchase, needs a proper assessment.

This is true whether you intend to buy property to use as a primary residence, a holiday home, or an investment property.

Sithomo stressed that the maximum amount you qualify for from the bank is not necessarily what you should spend. You and the bank might agree on what you can afford, but that doesn’t mean it’s manageable in real life.

Paying rent or a mortgage is just one essential expense. You still have many other financial obligations, so managing your disposable income with enough breathing room is critical.

Once you know how much you can really afford, he said to work backwards to determine what kind of property you should be looking at and where.

Since property is a feel-good investment, it’s easy to fall into the trap of buying emotionally. However, it is essential to remember that there are additional costs tied to buying property that people often overlook.

There are three broad categories of costs:

• Direct costs—like transfer duties, bond registration, rates, and levies.
• Maintenance and upkeep.
• Insurance.

When it comes to insurance, homeowners need to invest in two types: building insurance and home contents insurance.

Building insurance offers financial protection against unforeseen damage to a building or property. A building insurance policy typically covers fire, theft, and various acts of nature that can damage the home’s physical structure.

On the other hand, home contents insurance provides cover against loss, damage, and theft of the valuables inside the house, such as microwaves, televisions, and even jewellery.

Hippo Insurance explained that if you could tip your house upside down, whatever fell out would be covered under a home contents insurance policy.

When taking out home contents cover, it is essential to ensure you include all of your home’s contents so you can get an accurate valuation of their worth.

If you under- or over-insure, your insurance company may not pay out or cover only a portion of your claim. Sithomo said these costs add up quickly, so you should consider more than just the bond repayment.

A high-risk investment

Potential buyers also need to consider the effects of interest rates, impacting the amount they will pay for the property.

This is a significant difference when comparing renting and buying a primary residence. Sithomo said you need to weigh whether you can stomach the bond repayment on top of all the other costs.

Property may seem like an excellent, stable investment. While it may offer excellent security over the long term, property is still a high-risk investment.

Renting means fewer financial burdens and more flexibility to move in case of life changes. Owning property, however, is very illiquid. You can’t get in and out quickly of it quickly. It is also highly dependent on market conditions.

If you are not diversified in other assets, that can pose a risk. If your property is struggling, your capital is locked into that one investment.

With markets, you can diversify across sectors, companies, bonds, and equities, both locally and offshore. That diversity doesn’t exist in property.

For many people, buying a home means committing to repaying a bond for the next 20-30 years. While Sithomo said that he has seen cases of people repaying their loans in 5-6 years, that is still a long time.

Many significant changes can happen in that time, including death, critical illness, or mental health issues. And when you’re vulnerable, the last thing you want is to be forced to sell your property to cover healthcare costs.

He recommended that buyers do their homework. If you love property as an investment, research the right type and area. Know whether you’re buying to live in or to rent out.

If it’s an investment, consider your target tenant and what they’ll seek. Always ensure the property is affordable. Even investment properties have the risk of vacancies when the market shifts.