I would like to start off by talking about debt. We are mostly conditioned to believe that debt is bad, but I am going to tell you why it makes sense to use other people’s money to invest in property.
Most South Africans are up to their eyeballs in debt and our ratio of debt to income is in the region of 77%. Put simply we are good at buying stuff, but very bad at saving, and nearly 77 cents in every rand we earn goes to service the trillion rand plus we owe on our car repayments, credit cards, store cards, mortgages and so on.
But there are different types of debt, and some debt is in fact, good. Debt that you incur to maintain your lifestyle is all the bad stuff, the type that you want to stay away from, but debt incurred in securing an asset that gives you a return is good debt.
How can debt be good?
Because it helps you to get far better returns on your own money than your investment actually generates, most often referred to as leveraging. As an example, if I were to buy a property for R100 and sell it later for R200 I would make 100% on my money. However, if I borrowed the funds, and had to pay R20 deposit including interest and other costs, my R20 invested would have turned into R200, a 1000% return.
The big advantage in investing in property lies in the fact that fixed property can be used as security against which the bank will fund the major portion of your investment. It is possible to buy property with very little cash at all and even in this current market there are circumstances where a bank will lend 100% of the value of a residential property!
The art of leveraging
I often hear people say that they have gone off property investment because the growth in property prices is relatively flat. That is true if you are buying for cash, (or buying a non-investment type property like a residential house to live in) but if you are leveraging, a small increase in value in the property can turn into a generous return. This obviously also depends on the cost of borrowing, which must also be offset against the rental income.
Let’s look at the financing opportunities in today’s environment. How do you secure funding to get started? It has become a lot tougher since the National Credit Act came into being, but believe it or not banks are still in the business of lending money. They are however lending to the right candidate, so there are a few rules to follow if you want to qualify to obtain a loan.
Securing a loan
First, banks don’t look at the property alone but rather at the applicant’s ability to service the repayments. And they are a little nervous of investors, so treat the application as a homeloan if possible. To tick all the boxes it is easiest if you have a steady job with a genuine employer, and a few months’ bank statements. You will need to show the bank affordability, or your ability to pay the instalments from your salary after all your other expenses. The ratio they look at is: the portion of your bond instalment must be around 30% of your income. You will need to have a clean credit record with no judgments.
It can help if you include income from a co-applicant or spouse, and if you have a lease agreement with a tenant a proportion of that can be included as income.
So if your income, that of your spouse or partner, and your lease from a tenant add up to R20 000 per month you will qualify for a homeloan instalment of up to R5 000. That buys you a perfect investment class of a flat or townhouse of around R550 000.
When applying for finance, bond originators like BetterBond or Ooba can be very valuable channels as they can advise you and fine tune your application before submitting it to the bank on your behalf, but bear in mind that they don’t represent all the banks. Applications to ABSA and SA Homeloans for example should be done directly.
With a very small investment you can be up and running with your first investment property. It is entirely up to you. Make sure you find the right property, preferably an entry level flat or townhouse in an average area where you can expect modest capital growth and a high rental yield. This will be a good place to start.