Buy to Let Property Investment in South Africa
One of the common financial fallacies that keeps ordinary salary-earning South Africans from building real wealth is that, ‘you need money to make money’. While hard cash may be a requirement for most traditional savings and investments, this old adage is a fallacy when it comes to buy-to-let property investment.
The reason is simple: buy-to-let property allows investors to use the fundamental financial principle of leveraging or gearing, which is widely used by institutional investors and wealthy individuals to overcome the challenge of not having enough hard cash to invest in a good opportunity.
Leveraging is a powerful principle, as Archimedes reminded us hundreds of years ago when he said, ”Give me a lever long enough and I shall move the world”.
In simple terms, leveraging, or gearing, is simply using other people’s money instead of your own to invest. And the ability to leverage or gear an investment is one of the most outstanding and unique features of a buy-to-let investment strategy.
“Few people realise that you don’t need R500 000 in hard cash to buy a buy-to-let property valued at R500 000. You can borrow money from the bank in the form of a home loan to buy the property. By obtaining a 100% mortgage or home loan, the investor would ‘gear’ the investment 100%.”
In the current market, you may need a 10% deposit of R50 000, which would amount to 90% gearing.
Of course, it is all good and well if the bank gives you a bond, but how will you repay the bond every month?
Another outstanding feature of buy-to-let property is the fact that you are not simply investing in a property that will appreciate in value over time, you are acquiring an asset that is also generating an income each month.
And it is this immediate rental income that allows ordinary people to invest in property without hard cash, because the rental income from a well-chosen property will cover most, if not all, of the monthly bond repayments and other costs involved in owning and renting a property.
This means that ordinary South Africans can acquire a buy-to-let property with the bank’s money, and then use the rental income paid by the tenant to pay the bank each month.
Once the bond is paid off, and it is possible to do so within as little as 11 years, you will have a property worth far more than R500 000, thanks to capital appreciation, as well as an ongoing monthly passive income in the form of rental that increases in line with inflation year after year. And this dual return is achieved without a lump sum investment, and without a substantial monthly investment.
“The buy-to-let property investment model, which is used by the world’s wealthiest, including listed property companies to build real wealth, is proof that you can make money earning capital growth and a growing monthly income from a buy-to-let property without having money to invest.”
Do let the financial fallacy that ‘you need money to make money’ prevent you from building real wealth in 2015.
How to buy investment property that creates wealth
You can’t expect to just live off the rent of your investment properties. The numbers very often just don’t add up. To do this you would need to have a substantial property portfolio. Remember, you need to use the money you make from your rental income to pay off your debt such as your loan amount, rates, taxes, agent commissions and maintenance. The amount you make after deductions and expenses only really makes sense if you have a large enough portfolio of properties.
But how can you expect to grow your property investment portfolio to the point where you are making real money? Simple: by buying high growth properties and moving into cash flow by lowering your debt without paying it off in full.
It’s easier to have a larger value property portfolio with 50% debt than acquiring a portfolio of the same size with no debt. With 50% Loan to value you can apply for a loan from the bank, increasing this LVR but giving yourself extra cash to live off while growing your property investments. While this loan only pushes your LVR up slightly, during one year your properties will increase in value as will your rental income and by the end of the year your LVR will also be lower. You end the year with more than you started with.
How to build a property investment portfolio
To build your portfolio you need to be buying the right properties. Distressed properties and below market value properties are the best buys because their value will increase. The right properties to buy are:
- the ones that are scarce in the marketplace
- in the right location
- with the right price tag attached
- available at the right time in the property cycle
The easiest way to build a property investment portfolio is to have the right team of advisors on board to help you make the best, most well-informed decisions. Find your team and start building your property investment portfolio today for more wealth tomorrow.