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Do you want to own property? Read this

09 Mar 2012

Whether you believe that now is a good time to buy property to live in or as an investment asset, consumers need to be financially fit to do so.

Potential home owners should evaluate their financial ‘fitness’ before shopping around for a home to ensure that they are aware of what the property buying process entails and if they can afford the many costs involved, she says.

According to Linda Rall, KwaZulu-Natal provincial manager at ooba, although now is a buyer’s market, many consumers cannot afford to purchase homes because they are not financially fit.

Rall says when applying for a home loan, consumers need to prepare adequately and be in the best possible financial condition before entering the property market.

Potential home owners should evaluate their financial ‘fitness’ before shopping around for a home to ensure that they are aware of what the property buying process entails and if they can afford the many costs involved, she says.

It is important to consider prequalification as a way to evaluating one’s financial status.

By doing this, applicants’ credit profiles and affordability are checked upfront to ensure they qualify for a loan.

Prequalification will also give buyers a clear idea of their budget range, which allows them to house hunt accordingly, she explains.

“Prior to the National Credit Act, affordability was a simple calculation based on 30 percent of an individual’s income.”

Banks now use a combination of the 30 percent of the fixed income rule and Nett Surplus Income which reflects an individual’s income after all their deductions, such as medical aid and account payments.

She says this ensures potential home owners can afford their home loan repayments and future expenses associated with a new home loan, such as rates and taxes, home insurance and repairs.

Applicants will need to provide a credit record and details of their credit repayment behavior and conduct.

This is then used to evaluate the applicants’ risk profile when deciding on whether to approve the home loan.

Retail stores and banks’ default listings will remain on a consumer’s credit profile for two years and any judgment taken against the individual will remain on their profile for five years.

“Consumers should have their credit profile checked bi-annually to ensure all debt installment payments are up to date.”

Banks also look at the applicant’s current financial situation, whether or not the financial situation will change in the next few years and whether the applicant’s income is steady or fluctuating.

Retail stores and banks’ default listings will remain on a consumer’s credit profile for two years and any judgment taken against the individual will remain on their profile for five years.

“In the current environment, it is also advisable to have a deposit available as banks prefer consumers who invest some capital into the purchase.”

By ensuring one’s financial fitness, potential property owners are able to increase their chances of a home loan being approved, says Rall.

For those wanting to buy a home to live in or as an investment asset, it is equally essential to know what you are buying since property is a long-term investment.

According to Michael Bauer, general manager of IHFM property management company, property buyers and especially enthusiastic new investors need to understand the basics of property buying.

He says many investors are now divesting from volatile assets such as shares to more tangible asset classes, especially property as a hedge against inflation and to protect values. 

These investors are starting to build up property portfolios, which a decade from now could be very valuable.

Bauer warns that with a rush to cash in on the property values, enthusiastic newcomers to the property investment scene tend to overlook the fundamental rules of buying and investing in property.

If these are observed, success is achieved but when overlooked, they lead to serious problems and destruction of shareholder value. 

If you were thinking of buying property as an investment, here are a few tips to get you started:

- Accept that property investment should not be seen as capable of giving a ‘quick buck’ return.

Property should be seen as medium- to long-term investment in which the income stream is more important than any short-term capital gains.

- It is always wise to invest in property in recessionary or uncertain times because nothing is safer than bricks and mortar even if for a time, they give low returns as will other investments.

- Once you have accepted that property is a not a “quick buck” asset class, select the right location.

Certain areas are on the ascendant curve while others are on the way down and this is true in the lower end of the property ladder where demand still outstrips supply. 

Many areas are now increasing rapidly in value and gaining popularity. 

Try to identify them, checking whether they are served by public transport, schools and other essential infrastructure projects, because these can be decisive in adding value.

- The new property asset should from an early stage be able to produce a positive cash flow. 

Buying to achieve a profit “down the line is no game for small investors and those who focus on capital gains are unlikely to be rewarded in today’s market.

Ideally, the new purchase’s rent should cover its bond payments from day one but, if that is not possible, at least within 12 to 24 months.

Ideally, the new purchase’s rent should cover its bond payments from day one but, if that is not possible, at least within 12 to 24 months.

- To achieve a satisfactory return early on, it is essential to avoid overcapitalising on your property. 

Look at as many properties as possible until you find a real bargain and then exercise considerable restraint in going about improvements initially.

 - Diversify as this reduces risk and investors who do this often work on building a portfolio by buying one property per year.

These investors include in their portfolios both residential and commercial property.

- Once your investment is up and running, avoid the temptation to plunder it by drawing on the equity via an access bond.

Never forget that the reason for investing is to build capital – from which you can earn an income. 

Also try to avoid sophisticated, complex and expensive legal structures such as trusts, companies and syndicates, which are quite likely not only to be complicated but also subject to a higher tax. 

The best results are obtained by single ownership and if  possible, do not invest with family and friends as this can lead to acrimony and family breakups down the line if and when things do not go according to plan. 

- As far as possible, use the bank’s capital not your own and always try to obtain a 100 percent bond and keep your capital for those bad times when repairs or non-paying tenants make extra resources essential.

Bauer says it is not altogether accidental that up to 30 percent of the assets of the world’s richest people are in property, who knows, you could be one of them. – Denise Mhlanga

About the Author
Denise Mhlanga

Denise Mhlanga

Property journalist at property24.com

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