Anyone who has debt that maintains a lifestyle possibly needs to reconsider their strategy!
The person who uses credit cards to buy groceries or buy the “nice to have” stuff but then has to scrape by for the rest of the month to pay the minimum on their debt. This person who among most South Africans whose debt ratio is 77% – this means that 77c out of every rand is funding debt! This type of debt is generally regarded as “bad debt.”
But, there is a “good debt” that most people do not pursue. But if you acquire an asset that gives a return is regarded as “good debt.” If a debt helps you get a return that is better than the return on your own investment, then it is worth considering.
A simple example:
- I buy property for R100 and sell for R200 I would have made 100% profit.
- But, if I borrow the R100, pay R20 of my own money in interest and costs, and then sell for R200 then my investment of R20 would have made 1000% profit!
Investing in property is a great way to use relatively small amounts of your own money to secure an asset. The will banks loan the money, but secure the loan against the fixed property. The asset is then used to generate income and at the same time will appreciate in value.
This process, called leveraging, has put off some investors because they take the view that because some property values have flattened but they miss the fact that even a small increase in property value can translate into generous returns. For the investor who has the right strategy in place with a low cost of borrowing and carefully planned rental income, this is the right thing to do.
The perceived problem for some investors is the NCA (National Credit Act). They perceive that the tightening of the credit by the lending institutions will prevent them from investing. The reality is that the banks look at the ability of the borrower to repay the loan, rather than only the value of the asset.
Securing a loan nowadays requires a bit more “PT” but with all the correct elements in place any investor can begin to grow their property investment portfolio. Investors who have a steady job with a genuine employer, a number of month’s bank statements and are able to demonstrate to the bank that they have the ability to pay the instalments on the loan requested are off to a good start.
Banks look at a bond instalment as being about 30% of one’s income and that there should be no judgements and the borrower should have a clean credit record. Income from a spouse or co-investor, or a lease agreement and income from a tenant can all be included to support an application.
For example, if your income totalled R20 000 (from salaries, rental income etc) then you would qualify for a R5000 home loan that would enable you to buy an investment property of around R550 000.
A further word of advice here, it would be wise to shop around when applying for finance. Approach companies like BetterBond or Ooba to fine-tune your application before submitting it to your bank. However, they do not represent all banks. Applications to ABSA or SA Homeloans need to be made directly.
While we all like to have the vision for big things for our future, the first investment can be a small outlay, a starting point that can be built on as one’s ability, confidence and track record develops.