Nqobi Malinga, Portfolio Manager for uMaStandi at TUHF21
For many people, property entrepreneurship may seem like a daunting venture, and one that’s almost out of reach.
This is due to the preconception that it requires tens of millions of rands to develop a viable investment property. This is not without merit: as large conventional banks generally offer commercial loans that require the developer to inject up to 40% in equity in order for their project to qualify.
However, TUHF21 and through its specialised property financing company uMaStandi offers entrepreneurs an alternative way to move into the property market. With smaller, niche loans, based on the potential future cash flow of the property being developed, entrepreneurs can begin developing properties that fill a critical need for affordable housing in the townships and begin opening a passive income stream.
The most difficult part of the journey is often knowing how to get started, and what criteria you need to fulfil. Below are my top five tips for going from having a property dream to building a passive income:
#1 Define where and what you want to build
Understanding where and what you want to build is crucial to also getting your pricing right from the outset.
Firstly, your project will need to be in line with the appropriate land use rights. If you are building on a plot that is zoned for residential, you cannot build a 50-story development, for example, but you can develop smallholdings or complexes with several units that are intended for affordable, residential occupation by students, families and young professionals.
Secondly, it is essential to develop with your rental pricing in mind. There is no point developing units worth R8000 a month and only being able to collect R2000. Even as some developers may have ambitions to bring a Sandton-level project to Soweto, there is a relationship between cost and income that is important to strike the right balance of.
#2 You will need to provide some equity
It’s important to note upfront when getting started that you will need to provide some equity.
For any commercial investment property transactions, there is a loan portion and a portion that the investor provides in the form of cash. The days of receiving 100% loans are long gone. Instead, investors must provide a portion in unencumbered cash that constitutes as much of their own savings as possible to create equity in a project.
We look for entrepreneurs who want to be involved and partner up with us, and thus are willing to put their own money into the venture. It’s also important to have a long-term view. For instance, any loan with us is for 15 years, with the expectation of capital appreciation of the property. Securing a source of passive income and building generational wealth takes time, but township properties are appreciating in value. A house that was valued at R600 000 and converted into a building with 10 units could quadruple in value to R2 million
#3 Define ownership
Whether you are purchasing a stand that you want to develop on or aiming to convert an existing property into rental units, it is essential that you have a title deed and ownership is clearly defined. This is particularly important if you are dealing with a deceased estate, for example.
#4 Work with a trusted team
Possibly one of the most important but least spoken about steps about becoming a property entrepreneur and investor is that you don’t have to do it alone.
You can also seek support from advisors. For instance, while neither TUHF nor uMaStandi are involved in the design or physical building on the property, we do provide advisory assistance from assessing the feasibility through the lifecycle of the project. It is common for first time property entrepreneurs to make some common mistakes, such as the cost of construction outweighing the return on investment from their anticipated rentals, or identifying reputable contractors with a proven track record, etc. These are the kinds of expensive mistakes that we can steer you away from making and having to learn from the hard way.
Additionally, investing in property with us can be an inter-generational venture. Family members – grandparents, parents and children or grandchildren – could band together to form a company that can apply for financing with less risk associated with the loan. For example, if your grandparent owns a property they would like to develop, a younger family member joining the borrowing entity helps us as a lender know there is a successor who we’ve appraised in case of the untimely passing.
#5 Continuously invest in yourself
For first time entrepreneurs, and others as well, I strongly encourage you to continuously strengthen your knowledge of property development. To that end, TUHF offers a six-month training programme with the University of Cape Town called TUHF Programme for Property Entrepreneurship (TPPE). While it is free to our clients, it is also available to anyone for a fee, which also gives you access to a seasoned mentor for six-months who has several decades of experience in property development.
Property development may initially feel daunting, but for first time and returning property entrepreneurs with a willingness to learn and a desire to be a part of creating affordable housing for burgeoning townships, it is a dream that can become a reality.