Starting a property investment club with like-minded friends is an increasingly attractive investment option
But before you drop your hard-earned savings into a hard asset like a property, read Marc Psillos’ story about the risks and rewards of a property club.
In 2016, I started a property fund with a small group of good friends. As young professionals and entrepreneurs, we were all at a similar life stage and earning a stable income. And, getting into the property market seemed like an exciting way to invest.
Of course, going into business with friends is tricky. But we were lucky because we shared the same view of property as a long-term investment.
Finding the right (sweet) spot
We registered our club as the Pluto Property Fund to keep it professional and legal (but fun) and we are equal partners in the entity.
Our first step was to find the right property. We found a secure, sectional title residential property in a new development in the north of Johannesburg.
After locking in our interest with well-established property developers, we looked around for a home loan from different banks.
Relationships are part of the process
Two of my friends are Investec Private Banking clients and we were impressed at the bank’s track record in facilitating group property investments; and how it complemented our strategy for a group investment.
In our opinion, Investec offered us a better rate than all the options we looked at. And it was great to be able to speak to a Private Banker who understood the process and could guide us through it – step by step.
Unlocking the value of a home loan
Because we had saved a lump sum and could drop a 20% deposit on our first property investment, we secured an 80% loan on the purchase price of the property from Investec.
And, because we had less debt, we could start to make an income from rentals from day one. Typically, one can anticipate a 5% to 10% increase in rent over a five-year period. And the capital value of the property should go up over the same period if you have bought it in the right spot.
We used an agent to source tenants for our first property, but we carefully vetted the renters before they took occupation.
A digital interface
Our home loan was serviced from an Investec Private Business Account, which allowed us to transfer money in and out of the account (eg home loan repayments, scheduled levy payments, rental income collected etc).
What was great about the account was that we could self-service the account from an Investec Online profile. Most members of the club could access the account – either to view or transact.
Growing the club
We often increase our monthly contributions to the home loan to ensure we pay the loan off quicker. The money we save and earn from rental income goes into a savings account, which goes towards a home loan for the next property.
Over the next two years, we have invested in a second, larger property from the same developers in the north of Johannesburg. We also invested in a roomy apartment in Pretoria.
Treating it like a business
We believe investing in property is easier than running a day-to-day business, which we don’t have time for considering our demanding professional schedules. Moreover, we did our homework before we bought our first property and understood any risk going in.
So far, we haven’t encountered many conflicts among the group. As a group, we make decisions together and we were careful to manage the pressures from the onset. And we also make sure we have a healthy cash flow to ride out any downturns in the market.
We have a monthly meeting as an investment club and, on balance, it takes up about eight hours of our time. If we’re preparing to buy a new property, then the club may demand a bit more of our time and energy.
Three reasons to invest in property
Here’s what we have learned so far:
① The beauty of property is that people will always need housing and a place to stay. If you have the right property in the right location, you will do well. Ideally, you want both your capital and rental values to increase over the years (and not become flat or decrease).
② Property is a hard asset and, because you are locked into the investment, your commitment is long term and stronger. As you acquire more investment properties, your level of debt increases, so you must develop a track record and expertise in this space.
③ It is an opportunity to build wealth for the future. The younger you start thinking about investing, the better the returns tomorrow. While stocks and other investments often require a broker, this is something we can all participate in – it is a bit more ‘hands on’.
Marc Psillos is an associate at a leading bank.