Gearing makes property investment the ideal channel for the ordinary investor.
Category Advice
Although it is widely accepted in the residential property sector that there are few investment channels better suited to the layman investor than buy -to -let property, many others do not agree with this---and the reason for this, says Rowan Alexander, Director of Alexander Swart Property, the Cape Town Northern suburbs estate agency now expanding its operating area, is very often that the full advantages of mortgage bond gearing for a property purchase are not fully appreciated.
In most investments, says Alexander, the investor gets a specific or fluctuating interest on the money he has lodged with the financial institution-and that is the end of the matter. With a geared mortgage bond taken out with the object of buying a property, it is possible for the borrower to pay as little as 10% of the property's full sale price while the bank or lending institution on the buyer's behalf pays the seller the full price. The buyer is then charged the interest on the total sale price, minus the deposit already paid in. In many buy- to -let purchases, adds Alexander, the deposit is higher than 10% and the buyer is able to cover his bond payments from the start with the rents he or his agent collect monthly. Even where the deposit is small (or there is no deposit at all) annual increases in the rents will within a few years ensure that the monthly bond repayments are covered. And year by year the property will be growing in value.
Alexander took as an example a R1,225,000 purchase in Brick 'n Board's new sectional title development, Fountain Views, on which AlexanderSwart have been the agents and are now almost sold out.
Supposing, he says, the buyer has put down a R400 000 deposit and has been granted a bond of R825 000. From Day One it is likely that the rent will cover the monthly bond repayments-while, in the meantime, the purchaser will be enjoying the full annual capital growth on an asset worth R1,225, 000 although his input has amounted to only R400 000.
"In effect," says Alexander, "he will be earning three times what his cash investment would normally entitle him to. There are very few other investments in which so low an initial investment can give so big a return. If the purchaser had not made use of current low interest bond opportunities and resorted to finding the money required by some other means, he would have found that his interest costs were two to three times higher i.e. the investment would be nowhere near so profitable.
Many people, says Alexander, think that these arguments in favour of property investment are flawed because they do not take into account the fact that there can be downturns in the property market and times when a property may be hard to rent or may have a tenant who is unable to meet his payment obligations. These, says Alexander, are very real obstacles but they are seldom disastrous in the long run: in 90% of cases the investor can ride out the difficult period and still find himself with an excellent asset at the end of the day.
"The banks' willingness to allow credit-worthy clients to gear their debt on property has helped many thousands of South Africans to become property owners and this has gone a long way to alleviating the shortage of reasonably priced homes. For the ordinary investor this is the ideal way in which to build a long term investment portfolio."
Author: Independent Author
