How To Get Started On Your Property Investment Portfolio

Taking the initial steps to building a property portfolio can be a very daunting task for many young people who are trying to sustain themselves without direct financial support, mostly because they are unaware of the avenues and procedures involved in getting a foothold in this market. Starting a portfolio at a young age does not need to remain an elusive dream. This was said recently by Bill Rawson, Chairman of the Rawson Property Group.

In order to build confidence and master the fears that come with starting a new investment, says Rawson, thorough research and planning needs to be done. Would-be property investors need to explore all of their options and educate themselves before taking action.

Some of the main points to consider are:

  • How to structure the ownership investment (e.g. sole owner, partnership or trust)
  • How to finance the investment and what assistance is available to you, if any (e.g. tax rebates, urban development zones, surety and investment partners)
  • Which bank to use for the mortgage finance
  • Where to buy
  • What type of property to buy (sectional title, freehold, residential, commercial, etc.)
  • And whether to renovate the property or not

Of these points, says Rawson, the most intimidating and daunting is the questions of how the property will be financed. Getting approval for a mortgage bond and actually paying the bond off each month can be quite a challenge for a young person or family, but there are a few options available to them to ease this challenge.

If the investor has someone who is both willing to help and is in a strong enough financial position, usually a parent or family member, they can stand surety for them. This means that they agree to pay any bond repayments that the investor fails to do so on their own. For someone with a reasonable amount of disposable income, this can be a great option for them as they will only be paying the difference between the bond repayments and the rental income that they receive from the property — and in some cases, this rental income can cover the entire monthly bond repayments.

Another means of assistance in getting your investment started, says Rawson, is by going into the venture with additional investors. This can be quite risky because if one person defaults on their portion of the payments, the responsibility will fall on the others. It is therefore essential to invest with people you know, trust and that you are certain are in a position to always come through, i.e. close friends and family. Be sure to have a thorough Partnership Agreement drafted by an attorney so that there is a mechanism to deal with any transgressions or situations that may arise.

The banks, he said, are likely to approve a bond that is held jointly by two or more people because it spreads their risk, and the combined salaries of the investors will likely prove more than adequate for their loan criteria.

Also an important factor that a young property investor needs to consider, says Rawson, is what type of property to buy and where to buy it. In my opinion, he said, a low priced residential unit, in an area where year-on-year house prices are increasing faster than inflation and perhaps where future renovations can take place, is the safest bet to take for someone in this situation.

“A prime example of a very young investor who succeeded in breaking into the property market,” said Rawson, “is a case where John Weston, our Bergvliet franchisee, sold a property in Diep River to a young man just starting his career.”

The young buy-to-let investor asked his parents to stand surety for him and bought the property for R503,000 on a 100%, 20 years, prime rate loan (which is now at 9,25%).

The costs involved each month include a mortgage payment of ± R4,606 and levies, security and tax fees which, combined, come to ± R1,200 each month — his total monthly payments, therefore totalled ± R5,806. With the R5,000 rent payment that this investor receives, he is only paying a total of ± R806 per month from his own pocket.

By using the bank’s money to finance his investment he is, in essence, paying R806 for R4,606 worth of capital.

Even if interest rates increase each year, the investor’s rental will be increased too, which will work in his favour in the end.

In this situation, says Rawson, it is obvious that the young investor found himself in an almost perfect set of conditions, which enabled him to get such an advantageous outcome. Although not everyone will find themselves in such a position, there are still similar instances that young people can take advantage of.

This article was issued by Rawson Property Group –

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