Can you invest in property if you only have R35,000 available?
The answer is yes. There is a well-known concept used by seasoned investors called “OPM”, or “other people’s money”, and there is no need to think that you must amass a small fortune before you can start investing in property.
Start as young and early as you can to see your long-term wealth skyrocket, and, if you are not so young anymore, start now!
This is according to Meyer de Waal, a property attorney in Cape Town who is the brainchild behind the innovative Rent2buy product and Attorney Realtor Hub.
“It is a buyers’ market so if you want to invest in property today, and you do not use OPM it’s a little like having money in the bank and not earning interest on it,” he says, elaborating on how property investment using OPM works, compared to other investment asset classes, such as shares, crypto currencies and collective investments.
If you have R35,000 available to invest and you consider buying shares, you can buy them on the stock market directly or through a broker. The best advice would be to find an experienced broker to assist you with research and investment.
“The ‘problem’ is that R35,000 only ‘buys’ you shares to the value of R35,000,” says de Waal, noting that R35,000 can be used as a deposit on a property selling for R1m, with the balance being paid for by the bank – or OPM! “Furthermore, you can use a tenant to pay for the property finance and expenses (in full) and you receive the full income and capital upside (or, in essence, get the property for free).”
Coming back to your R35,000 worth of shares: If you invested wisely and your R35,000 share portfolio grows by 6% per year, after two years you will be about R4,200 richer.
“If your R1m property grows in value by the same 6% per year, you will be R60,000 richer,” says de Waal. “Thus, your return on capital invested (the deposit only) is 171%, and not 6%. This is also not taking into account your rental income on the property which should deliver around an additional 12% gross income yield per year.”
Your rental income also escalates annually by more than inflation and if you buy a cashflow-positive property from day one, your property will pay YOU, with the rental amount increasing every year.
If you want to draw money from your share portfolio, you need to draw from your growth and/or capital, taking you back to square one; your property, however, still grows in value and does not lose equity, according to Anton Breytenbach, CEO of Empire Wealth.
“Do your own research to become and expert investor,” says de Waal. “One hears horror stories of brokers who invest a portion of a pensioner’s money in a high-risk investment to achieve maximum returns, and then loses most of portfolio when the share prices come down.”
What about crypto currencies?
Investing in crypto currencies was the flavour of the day a few months ago. If you invested recently, however, you likely lost a large sum of your investment.
“In contrast, property on average grew by 3% in Gauteng and 8% in the Western Cape annually over the past few years; even doubling in value in some places in the Western Cape over the past three years,” says de Waal.
Safe as houses
If you have R35,000 to invest in property, you may ask the question: “What is the point? There are no properties that I can buy for R35,000. I will never be able to invest in property as the average purchase price of a property is close to R1m.”
You also don’t need R35,000 to start, says de Waal, using the example of Noma.
“Noma owned an RDP property for many years,” he says. “When she sold the property after 12 years she made a handsome profit of R35,000. She then reinvested her profit and used it as a deposit to buy a larger property in a better area. Today she owns four properties! One may think that she earns a large salary, but she earns less than R15,000 per month and her four properties are now giving her an income.”
Noma’s property investment strategy is to buy affordable properties that she can rent out on a cashflow-positive basis from day one.
“It is extremely important to plan your investment strategies to achieve your financial goals,” says de Waal.
“First establish your goals and then reverse engineer the planning process. You want to plan your wealth structures, multiple financing strategies and investment focus in the short, medium and long term to have them all work in sync,” says Anton Breytenbach from Empire Wealth. “As a property investor you want to pay as little tax as possible, protect your assets against risk, minimise your estate, life and death costs, and maximise your financing potential when planning your wealth structure.”
Creative property finance, from R18,800
If you have R35,000, or even R18,800 available, you can buy a property through the Rent2buy Finance product.
“A deposit of R35,000 can secure you a property to the value of R1m, and a deposit of just R18,800 can get your foot in the door with a property valued at R550,000,” says de Waal. “We found such investment opportunities around the country, even in Bloemfontein.
“Now, if once compares the growth of an investment of R1m over a period of 24 months, at a growth rate of 6% per annum, you will end up R120,000 richer on a capital growth amount.
“It makes a lot more sense to let R1m grow, rather than R35,000. This is called ‘gearing’.”
What is “gearing”?
De Waal says the term “gearing” is the same as using “other people’s money to invest”; thus gearing your own investment with a multiple to achieve that 171% growth.
As an example, if you go to any of the top financial institution and you want buy shares (even their own shares), they may only lend you R35,000 to buy shares to the value of R35,000.
“The lender may even ask you for extra security for the loan and you may have to cede a policy to them as security,” says de Waal, noting that if you put down a deposit of R35,000 and invest in the right property, you can gear that R35,000 deposit using leveraging to secure a property of R1m.
“Such investment opportunities are available through the Rent2buy Finance product,” says de Waal.
“One needs to look at the additional costs that are associated with investing in a Rent2buy Finance product, such as the monthly repayment required to invest in such a property and the costs of taking transfer of the property after the initial two-year rental period.”
The traditional way: Home loan
You can always approach a bank for a home loan. If you apply for a 100% home loan you may be able to buy your property using OPM, says de Waal.
“If you do not buy a property that includes all legal costs (for example from a developer, or even getting the seller to finance the costs) you may need to use your savings of R35,000 to pay for the purchase fees,” he says. “The fees are usually payable by the purchaser to the property transferring attorney and the attorney who will register the mortgage bond.
“One needs to also factor in the additional costs of owning a property, such as monthly rates and taxes, levies, maintenance and insurance costs, and to calculate the actual percentage a property grows year by year (your net return on investment). If you live in the property, also consider these expenses against your capital growth. But as one can see, the benefit of owning property far outweighs these costs.
“If one can invest in a property that is cashflow-positive from day one, the rental income obviously absorbs extra expenses and you are in effect getting your property for free. Once your net rental income has paid you back your R35,000 invested, you will literally have acquired the property for free and your return is then infinite.”
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For more information:
Meyer de Waal
021 461 0065