Investing in property is invaluable, offering long-term rewards and is still regarded as one of the safest permanent investments. Most people would like to diversify their property portfolio but think they won’t be able to afford it or that they will not have the money for a deposit.
“Purchasing investment properties can be capital intensive, but there are ways to reduce the capital requirements by approaching the investment in an informed manner,” says Craig Hutchison, CEO of Engel & Völkers Southern Africa.
When it comes to property investment, there are many strategies to adopt, depending on your personal situation and goals. We look at a few creative ways to approach your real estate investments:
Partnerships: a typical way of obtaining financing. It is the way many young real estate entrepreneurs go about financing their projects. By finding investors who can put the money up and split the profits on the upside. This also limits your risk and makes the money go further.
Private lenders: a less risky alternative to a better cashflow. This is because you can often arrange the terms of repayment with the private party. They can be anyone such as a friend or business acquaintance. The loan’s terms are agreed upon by the two parties, which can make purchasing a property with little or no money a likely possibility.
Rent-to-own or lease with an option to buy: This option is especially great when considering how to buy a first rental property. If you have a lease-option for five years, at the end of that time, you will need to purchase the house and can get a bank loan then. Meanwhile, you can use the time to fix your credit and/or save for a down payment. Some contracts may put some or all of the rental amount towards the deposit.
Use a home equity line of credit from another property: If you have equity in another property, you could use that as a deposit on purchasing another investment property.
Borrow against your own home: Some people in this situation choose to extend their mortgage to release the cash to invest elsewhere. Some financial institutions will be happy for you to borrow more against your house in order to invest in property. Once you are able to buy an investment property, you can refinance it in one year.
Rent rooms in your home: If you own your own home, you can raise money by renting out a spare room. If you’re willing to put in more work, you’ll get higher returns by renting your room through a short-term lettings agency. The profits can be very high if you live in an area with decent tourist, student or business demand.
Borrow money for a deposit from a relative: If you are fortunate to have a relative with some extra funding and you really know your stuff and can produce a compelling business case, it might be worth a shot asking them for funding towards/for a deposit to purchase the property.
Invest with friends: If your friends or business partners also have a passion for property, you could always invest together. If you do decide to invest with someone you know, make sure you’re 100% aligned, discuss what you want to do, and all those scenarios that could go wrong. Plan what will happen if someone wants to sell and the other doesn’t – or one person needs their money back unexpectedly, and get it all down in writing.
An instalment sale: this is an agreement documented in a water-tight contract between a buyer and a seller that the buyer will pay off the purchase price in monthly instalments within five years. This enables a buyer to acquire a property by paying the seller in more than two instalments (in usual bank-financed transactions there are two instalments: the deposit and the final settlement amount) and over a period longer than one year, but not longer than five years. Once a buyer and a seller have agreed on a price, the payment arrangements and the terms and conditions, a special purchase contract is drawn up by attorneys that specialise in ALA transactions, which meets all the requirements of the ALA to ensure the transaction is legal and protects the interests of all parties.
Only a handful of investors will make it past their first investment whilst climbing the property ladder even though their intentions were to make it big in real estate.
“Establishing and expanding your property portfolio needs to be done with careful forethought to ensure you get the most out of it,” concludes Hutchison.