How To Make Money From Property In South Africa

Wondering how to make money from property in South Africa?

For most people when they think about property investing one of the first things that come to mind is probably a buy-to-let strategy. Buying a starter property like an apartment or townhouse and renting it out.

However there are many more ways to make money from property in South Africa than you think. Some are more obvious than others but this article will likely give you one idea you never thought about before.

Another thing to consider is the type of investor you are.

How much excess capital do you have?

How much time do you have?

What is your risk appetite?

Do you have a long term view of a shorter term view with your capital?

We will cover these items under each strategy.

Yet an additional consideration is that some of these strategies apply only to residential properties, while others can be applied to both residential and commercial properties.

To address this, we will also note whether a particular strategy is suited to residential or commercial or both.

Lastly, where we mention that a particular strategy has capital requirements (Medium, high or very high) it means the project you undertake may require large amounts of capital.

However this does not mean YOU need to have the capital yourself. You can always raise it from funders or private lenders.

How To Make Money From Property In South Africa: 16 Strategies

 

Money Free Methods

The following methods of making money from property don’t necessarily require any money to get started, but some of them will require more skill and knowledge from the individual.

What all do require however is the commitment of TIME.

You are essentially putting in time to find and close these deals

1. Become An Estate Agent

Becoming an estate agent is one way to make money from property.

The one drawback about following this route is that you do need to become registered and firstly apply to the Property Practitioners Regulatory Authority. Thereafter you need to register and write the Professional Designation Exam (PDE).

Thereafter you can join an estate agency and begin your role as an estate agent.

As an agent your primary manner to make money from property is the sale of property and earning a commission on the selling price.

The typical commission earned by an agent on a property deal depends on whether it’s a residential or commercial property transaction.

On residential properties, agent commissions can range from 3.5% to 8% of the selling price.

Because of the size of commercial property transactions most agents typically earn a commission around 3 to 3.5% of the purchase price.

In all cases the commission is paid by the Seller of the property.

Best Suited to: Residential or commercial

Time Commitment: Low to Medium

Capital requirement: Minimal (other than the cost of becoming registered)

2. Sourcing Agent

Property sourcing agents make their money by finding properties and earning a fee from property investors. Some might call it a finders fee.

Finding good property deals takes time and requires that a property investor go through a large number of properties to find the good deals.

So instead of finding these deals on their own, they use the services of sourcing agents to bring them good opportunities.

In most cases sourcing agents will be area specialists which allows them to be the experts to sellers and buyers. This, like most businesses is relationship driven.

The sourcing agent with the best relationships will likely be the one with the most available deals. So it pays to become an area specific sourcing agent and build relationships with property owners long before they need to sell and before buyers need to buy.

Unlike estate agent commissions, the sourcing agent fee is typically a standard amount (for example R5,000, R7,500 or R10,000), as opposed to a percentage of the purchase price.

Another key difference between being a sourcing agent and an estate agent is that the BUYER pays the sourcing agent. Whereas estate agents are paid by the Seller.

Time Commitment: Medium (you need to spend quite a bit of time finding deals)

Best suited to: Residential or Commercial

Capital Requirement: Minimal

3. Property Dealmaking

Property dealmaking is a hybrid between what an estate agent and sourcing agent would do. This is not a commonly known strategy because it requires a higher level of skill than most estate agents and sourcing agents possess.

This is a term that I coined to explain many of the deals that I have personally been involved in.

Think along the lines of a merchant/investment banker who originates and structures complex transactions between parties involved in a business transaction and then earning a fee based on deal size, or taking an equity stake in the transaction or both.

An examples will better explain this

Example: Property Dealmaking

I recently found a property where the owner wanted to sell a house that had excess land of about 6,000sqm, in an upmarket area. There was already an estate agent involved and the agent had been trying to sell the property for more than 12 months. But the seller’s asking price was drastically above the market values in the area.

In addition, the owner lived in another country so the chances of a sourcing agent getting in on this deal and offering the property to an investor was very slim.

Because of my relationships in the market with property developers and understanding property, I was able to get the Seller (through the agent) interested in a Joint Venture development. An important note here is that I did not specify that I’m a dealmaker. I acted as if I was the actual developer

So I make an offer to JV on a development where the seller leaves the land in the deal as equity. I then take the deal to a property developer and structure a deal with them to develop the property into an upmarket residential complex.

The developer and property owner then share in the development profits equally and I retain about 10% of the development profits.(As an alternative I could also just have taken a fee for structuring the deal).

Remember there is an estate agent involved here as well, so he still earns a commission on the profit that the property owner makes.

Now, instead of this property sitting on the market not being able to be sold, it can be developed and all parties involved can make a profit.

This is a great example of being a property dealmaker.

Some might still say its a sourcing agent or estate agent deal. But here’s the difference in actual numbers:

– A sourcing agent would have taken the deal to a buyer and possibly collected a finders fee of say R10,000

– The estate agent has been trying to sell the property for around R9m but could not find a buyer at that price. But If he had found a buyer he would have earned around 7% on R9m , which is R630,000.

– In this deal, as a dealmaker, the fee earned is not based on the value of the house. It’s based on the value of the total development profit, which was estimated at R25m. The dealmakers fee in this deal would be around 8 to 10% of the profit, which would equal R2m to R2.5m……….

BIG DIFFRENCE!

Time commitment: Low to Medium

Best Suited to: Commercial and Residential

Capital requirement: Zero

Short Term Property Deals

Under this section, the property deals are of a short term nature, averaging 3 to 12 months and often includes some capital outlay.

These strategies are well suited to people who have some excess cash, a decent appetite for risk in exchange for higher profit and some technical expertise is recommended, while not absolutely required.

It is also suited to people who need to turn cash around fast and who cant have their capital sitting in a property for years. The name of the game is “quicker CASH FLOW” here.

4. Fix and Flip

In a fix and Flip deal you search for and buy properties that require some work and then sell at a profit. These projects would typically run for about 6 to 12 months. But the shorter the better.

If you know properties in a certain area in good condition sell for around R1.5m and you can buy a property at R750,000, and spend R250,000 renovating the property. You then sell at about R1.3m (so that it sells fast) and pocket a R300,000 profit.

This is a simplified example but it gives the general idea.

Time commitment: Medium

Best Suited To: Residential (can be used in commercial for more advanced investors)

Capital Requirement: High

 

5. Wholesaling

Otherwise known as “contract-to-contract” deals, property wholesaling involves the simultaneous purchase and sale of a property and can often be done with little to no money down.

Unlike the sourcing agent strategy where you simply take a deal to a buyer to purchase and collect a small fee for your troubles, in a wholesaling deal, you negotiate a deal with a buyer at a good price. Then you sign another OTP with a buyer for a slightly higher price and make a profit.

So you buy at the WHOLESALE price and sell at the just under the RETAIL price.

Knowing your sellers limits and your buyers limits upfront is critical in this strategy. But if done right you can profit handsomely and turn around cash in 3 to 12 months, depending on the type of property and deal structure.

Because there are two contracts signed at similar times, the property transfers from the seller to you to the buyer all on the same day. I love this strategy and use it often

Time commitment: Medium (ie. requires leg work to build relationships and find deals)

Capital Requirement: Minimal

Best Suited to: Residential and Commercial

6. Property Private Lending (hard money loans)

This strategy does require that you have access to capital, because here you become the funder to property investors.

So you would provide short term loans to property players who need funding for their “fix and flip” or other strategies, charge higher interest rates than a traditional lender and take a bond over the property as security for the loan.

In return the property investor pays you interest plus capital over a short loan period, usually 6 to 12 months.

This strategy is quite technical and it is advised to use an attorney to help draft your loan documents.

Time commitment: Low

Best suited To: Residential or Commercial

Capital Requirement: Medium to High

7. Property Development

Property development is a poplar strategy but focus is key. This normally involves the purchase of land or existing buildings and adding value to them by way of better property rights (ie. taking land from agricultural zoning to residential or business zoning) or physically (ie taking land and building townhouse units) and selling at a profit.

This is a much riskier strategy and requires significant expertise and capital. It is highly recommended to ideally partner with an existing, experienced developer on your first few deals before going it alone.

Property developments can take months or even years to finalise so your capital is tied up for long periods of time. Thus, ideally you want to have some other form of income to carry you while you do these projects.

Time commitment: High

Capital Requirement: Very High

Best suited to: Residential or commercial

8. Live-In-Flip

A live-in-flip strategy is when buy a property to live in for a short period with the intention of flipping it later.

This could be a scenario where you buy a property that requires some work, but instead of doing a fix and flip, you decide to move in and do the upgrades while living in the property.

There is a tax benefit here if the property is considered to be your primary residence, in which case the first R2m of any gain on the sale of the property is excluded from Capital Gains Tax. So speak to a tax consultant or accountant about taking advantage of this special exclusion.

Time commitment: Low to medium

Best suited to: Residential. But could be used in a commercial deal. For example if you buy a block of 4 to 6 units and live in one, while renting out the rest)

Capital Requirement: Medium

Long Term Strategies

9. Buy To Let

The simplest property investment strategy where most people start is the “buy-to-let” method.

This simply means that you buy a townhouse or free standing house with the intention to lease it out and collect a rental income.

Unfortunately this can also be one of the least profitable strategies, unless you are able to buy the property at a significant discount. In most cases however you typically collect somewhere around 1% of the purchase price as rental income.

This means a property costing say R600,000 is able to generate a rental income of R6,000pm gross (before expenses). If you have a bond to pay, there is very little profit left over each month and as such this why it is a very long term strategy where you pay off the bond from the rentals in 20 t0 30 years.

Of course if rentals continue increasing each year you could pay all the profits into the bond and repay the loan faster, but this is the exception rather than the rule.

Time Commitment: Low to medium (depending on the types of tenants you have and the level of maintenance required on the property)

Best suited to: Residential or commercial

Capital Requirement: Medium

10. House Hacking

A house hacking strategy is a slightly more profitable rental income strategy, but it might not be for everyone.

This refers to a situation where you purchase a property and rent a portion of the property out for income, to reduce your monthly living costs.

An example could be the purchase of a home with an additional cottage on it. In this case you live in the house but rent out the cottage.

It becomes profitable if you can have 2 to 4 cottages/units on the property, which could result in you covering your bond and still making a profit as well.

Adding one of the rooms in your home or cottage on AirBnB can also be considered a house hacking strategy.

Time commitment: Medium

Best suited to: Residential or commercial

Capital Requirements: Medium

 

11. Multi-Let Strategy

Similar to the house hacking strategy, but a level up on the profit side in most cases is the Multi-Let strategy.

Here, you buy a house, but unlike the house hacking strategy, you do not live in it. Instead you divide the property up into multiple sections and rent out the rooms or portions to different people.

So instead of collecting say R10,000pm rental from a 4 bedroom home by renting it out to one person/family. You might decide to convert some of the living areas into 4 additional rooms as well, turning it into lettable space, then renting each one out.

Assuming you could collect R1,800 per room. At 8 rooms that house is now making you R14,800pm, instead of R10,000.

This does come with added management issues of course, since you are now renting to 8 tenants instead of just 1.

But it is a great strategy to turn your investments cash positive in the short run.

Time Commitment: Medium to high (can require more time to be invested in management because of the added management burden)

Best Suited to: Residential

Capital Requirement: Medium to high

12. Student Accommodation

South Africa has a tremendous shortage in student accommodation, so it is no wonder so many investors choose this as their method to make money from property.

Similar to the multi-let strategy, you can turn a low rental property into a high rental property by breaking up the rooms into more living units and renting out the space to multiple students.

In the student accommodation space, you charge on a per bed basis. You do however need to furnish the units in most cases to achieve good rentals. In this strategy, rental is charged on a “per bed” basis.

The closer you are to a university the better. The better the quality of the rooms the better as well.

Depending on the area you could earn about R2,000 to R4,000 per student bed. So a 5 bedroom property with 2 students in each room could gross about R25,000pm rental, if you assume R2,500 per bed.

Also a very lucrative strategy but do your research on the area before jumping in so you understand the market.

Time Commitment: Medium

Best suited to: Residential or commercial

Capital Requirement: Medium to High

13. AirBnB

One of the most profitable and best multi-let strategies available these days is the AirBnB strategy.

This is where you turn a townhouse or free standing house into a AirBnB property and list it on the website. Users on AirBnB search for accommodation in various locations and if you are a standout host with a good property, they might select you.

What is great about this strategy is that instead of charging your occupants on a monthly basis, you charge on a “per night” basis. So the income potential is increased significantly.

However there are higher management costs since you would need to pay for things like housekeeping. It does still prove to be a more profitable strategy and the occupants you “rent” tend to be better quality compared to other multi-let strategies.

Often they could be business people who just need a place to stay so they can attend meetings in the area for a few days. But some become regular visitors to your property if they are impressed with your service.

Certainly an opportunity to look into.

For those with limited capital, you could even get into this strategy without actually owning the property. You simply find a property to rent and negotiate a sub-let clause into the lease agreement with a willing landlord.

Then turn it into a AirBnB property, collect your income, pay the rent and expenses and if you do it right, you get to still keep a handsome profit. This technique allows faster growth because you can get more properties onto your book sooner, versus trying to buy all the properties yourself.

Time commitment: Low to medium (but might need to be full time as you acquire more assets)

Best suited to: Residential

Capital Requirements: Low to Medium

 

14. BRRRR

The Buy-Renovate-Rent-Refinance-Repeat strategy is helpful in assisting you to do any of the strategies just mentioned but works best with the various Multi-let options that allow for higher income.

What you do here is identify a property that has good income potential, for example a student accommodation opportunity.

You put in an offer to BUY the property. Because the property is not in the best condition, it will be harder to raise finance from a normal Bank. So the initial finance to buy and RENOVATE the property is raised from a Private Lender / investor at a higher than normal rate on the basis that it is short term funding.

After the property is renovated you RENT it out per your business plan, to multiple students as in this example. If your numbers worked out you should be able to collect enough rent to cover the property expenses and the private lenders repayment.

Once the property is and tenants are settled down, you should have an asset that is now worth more than it was when you bought it. Plus you’re collecting a good rental.

This is when you will now go to a bank to REFINANCE the property by getting a loan from the bank. With the loan funds you will repay the private lender his capital plus profit/interest owed and you now have a property that you own that is making you passive income after all expenses are paid.

Next, you find another opportunity and REPEAT the process.

Applies to: Residential or Commercial

Time Commitment: Medium to high (more time may be required during the renovation stage)

Capital Requirement: Medium to high

Passive Property Investing

15. Property Syndication (Investing or Lending)

Property syndication is where you combine your money with other investors to buy an investment property or to make loans to property investors.

The idea in most syndication deals is that instead of you finding the opportunities and doing the deals yourself, you invest in the deals of other investors.
Syndication is helpful when you do not have the time to find deals on your own or the time and resources to manage them as well.

So the property investor finds the deals and manages them, while you provide the funding a get paid from the profits of the investment.

It’s very important to know how to assess not just the property opportunity, but also the people behind the deal and their experience.

Another way of doing a property syndication, which wont be a as passive as you may like, is to find the deals yourself, manage them as well and form your own syndication by raising finance from other investors. This is also referred to as crowdfunding sometimes.

In this way you could follow any of the strategies above with residential or commercial properties and put together syndications to finance your deals.

Time commitment: Low

Best suited to: Residential or commercial

Capital Requirement: Medium to High

16. REITS

Real Estate Investment Trusts are property companies that purchase various, large commercial properties and issue shares to investors to own a small piece of these investments.

So instead of making an investment in just one single property, you are buying shares in a company that owns many different types of properties, manages them and pays dividends to investors like you.

This is the most passive form of property investment because you don’t have to do anything in terms of finding the deals or managing them. That’s the benefit.

The downside is that unless you have a large amount of capital you probably wont make much money from this strategy.

A great approach is to combine this strategy with another one that can generate a large amount of capital. For example, you could do property wholesaling deals, fix and flip deals or even property development deals where you develop and sell off the properties.

In these strategies you receive a large lump sum of capital when you close the deal or sell. The you take that capital and invest it in REITs for passive income.

Time commitment: Low

Best Suited to: Residential or Commercial

Capital Commitment: Medium to High

Conclusion: How To Make Money From Property In South Africa

You’ve just learned some great ways to make money from property. Some are great for building capital. Others are awesome for passive income.

The good news is that you can do do multiple strategies once you get the hang of at least one. For example you might do Property dealmaking for large cash inflows in the short term and also have a student accommodation property in your portfolio for long terms wealth creation

The key is to keep educating yourself and get around like minded people and networks that are on the same financial freedom journey as you.

There is no “BEST STRATEGY” but rather there are “the best strategies for YOU”. So take your personal circumstances into account and then choose the strategies that will be best suited to your needs and goals

Good luck!