Residential Property : Beginners’ guide for would-be home owners
A few observations by Kutlwano Rasodi, project manager, Rabie Property Group
Many conversations about purchasing property either as an investment or in which to live have been had between ambitious 20-something-year-olds looking to build wealth. These conversations often result in the blind leading the blind and after much speculation there may be some valuable knowledge passed around but seldom any certainty. This article by Rabie project manager Kutlwano Rasodi aims to help those who want to stop talking and start doing.
There are very few people who make their first million in their twenties so the majority of under 30s looking to purchase property will have to do so through a home loan which in many instances can be a barrier to entry as banks being banks need assurance that the lender will be able to repay them and they seem to have little faith in individuals who are new to the labour market. Getting a grip on the bond application process is the first step to a successful first property purchase.
The minimum home loan from most South African banks is R100 000 but the amount granted by the bank is dependent on a number of factors. In the current climate of tighter credit, banks are reluctant to grant 100% bonds and in most instances require a deposit. So would-be first time purchasers need to starting saving to stand a better chance of securing a bond.
The property you will be able to purchase will be determined by to the Loan-to-value ratio (LTV) – the financier will look at the ratio between the loan required and the property value. In the current market the LTV is expected to be around 75%. The lower the LTV the lower the interest rate is likely to be.
Other issues banks take into consideration when assessing a bond application is whether or not the would-be purchaser has a clear credit history, has been employed for a minimum of 2 years, is over the age of 21 and earns a minimum income of R10 000 and has proof of this.
Those who are looking to buy property purely as a buy to let investment need to be aware that it is highly unlikely that the investment will be cash flow positive from day one and that they will no doubt have to initially dig deep to finance the shortfall between rental income and bond repayments and any other costs including rates and taxes or levies if it is a sectional title investment.
There are two approaches to property investment, namely income motivated approach and the capital motivated approach.
The income motivated approach looks at buying to let and to hold on to the property for the medium to long term. The capital motivated investor on the other hand looks to buy property then sell it on for profit after holding it for a short term.
Jason Lee, in his book Making Money out of Property in South Africa, suggests that an investor does not have to choose one or the other approach but could embrace both and even use the profit from the capital deals to reinvest in the income deals and in so doing gain some financial leverage and make the investments cash positive.
First time buyers should also bear in the mind the additional costs incurred when purchasing a property namely transfer duties (if a second hand property) or VAT (if bought from a developer), bond registration costs and stamp duty.
All the requirements, costs and commitments that go into purchasing a property can make it a daunting task particularly for first time buyers. Many might be discouraged by this and the fact they do not fully qualify or even if they do qualify for a loan the financial strain of a full bond repayment. A way around this might be to partner with others in the investment and to apply for a joint loan. In this way you could qualify for a larger loan amount than you would have on your own and will only be burden by a pro rata bond repayment and associated costs.
This article may not answer all the questions that come up at dinner conversations among potential first-time buyers but it does highlight some of the issues that you need to bear in mind before making your first home purchase.