Property can be used as an investment vehicle. It forms part of the four investment options available to you (the other three are equity, bonds and cash). It is also by far the easiest vehicle to understand because there is a physical asset (like a building, apartment or a farm). We as South Africans particularly like property and even government has mentioned that property (or land) must form the bedrock of wealth creation and economic freedom.
So let’s be honest and not wait for someone else (i.e. government) to realise your dreams but rather put a plan in place to buy your own property. Property has numerous investment advantages but in my opinion there is one very big advantage that puts it in a very favourable position compared to the other options. The technical term is leveraging but in layman’s term it means you can use other people’s money to buy the property.
Unlike the other asset classes, you don’t first have to save R1 million to buy a property worth R1 million, but rather borrow the R1 million from someone (like a bank) and immediately buy the property. This puts you in a very favourable position because you only pay a very small part initially but get investment growth on the total value of the property. Obviously you need to account for interest that you also have to pay, but if you do the calculations correctly you can position yourself in a safe and secure position (even with the debt).
There are 27 variables that determine the potential return a property can deliver so it is very important to do your analysis. This does not mean that ALL properties are good investments – you still need to do your homework and make an educated decision. But how can WealthPro help you in your new adventure?
To be able to qualify for a loan of R1 million to buy the property, the bank will look at your personal financial situation to determine whether you are credit worthy. You will need to pass their affordability criteria. The monthly repayment on a bond of R1 million will be roughly R8961 per month. The banks use a 30% repayment rate which means that you need to earn a gross salary (before tax) of R29 870 per month (8961 / 0.3). If you don’t earn that, you will need to reduce the loan amount you want to apply for (maybe start with R500 000).
Your first challenge should be to start the habit of saving money (for the future property you want to buy). In our example you will need R8961 per month. Let’s say you can only afford R2000 per month. What you would do is to create a “Buy a House” goal on WealthPro and start to save R2000 per month in the investment. Then as your circumstances change, you will slowly increase your contributions from R2000 per month to maybe R4000 per month and then later R5500 per month as an example and keep increasing it till you reach the target amount. Remember if you are currently renting you can deduct the amount you are currently paying from the amount you require.
If you currently pay R5500 per month rent, then you would only need to save an additional R3461 (8961 – 5500) through WealthPro. As soon as that happens, you now know you can afford the R1 million property (keep in mind there will be additional costs like rates & taxes, levies, electricity that you also need to budget for). Because you can amend your contributions at any time you will then adjust your contributions in WealthPro down to R0 or whatever the amount is that you will still be able to afford. It is as easy as that.
The second challenge (this is currently where a lot of homeowners are struggling!) is the initial costs involved with purchasing a property – this includes transfer costs and taxes. To buy the R1 million property will cost you upfront R47 189. This might sound like a huge amount but wait: remember the affordability strategy to get around the first challenge? You’ve been diligently using WealthPro to build the required monthly amount in your budget.
By doing this over an extended period you have accumulated a large amount of money. In my experience the amount that you’ve saved up in WealthPro will be much more than the required R47 189. You would then withdraw the funds and use it to pay the upfront costs. There might even be some change left for a deposit, to buy some furniture or a mini revamp.
So do you still think owning a property is not within your reach? With WealthPro the sky is the limit!