Is it possible to own your property if you only have R10 000 available secure it, with no home loan?
“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,” says Meyer de Waal, a property attorney in Cape Town, creator and architect of the Rent2buy concept and member of Attorney Realtor Hub.
With the Rent2buy concept one can even expand such to “OPP”, or “other people’s property”, says De Waal.
“Start as young and early as you can to see your long-term wealth skyrocket. If you are not so young anymore, start now.
It is a buyers’ market, so if you want to invest in property today, and you do not use OPM or OPP, it’s a little like having money in the bank and not earning interest on it.”
In this article, De Waal elaborates on how property investment using OPM & OPP works, compared to other investment asset classes, such as shares.
If you have R10 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 R10 000 only ‘buys’ you shares to the value of R10 000,” says De Waal. “It is worth noting that R10 000 can be used as a deposit on a property selling for R600 000, with the balance being paid for by the bank, or through OPM or OPP,” says De Waal.
OTHER PEOPLE’S PROPERTY – THE CONCEPT EXPLAINED
If you find a seller who is willing to engage with you in a long term agreement to secure the property for you and pay off the purchase price, the concept of OPP, “Other People’s Property” kicks in. You do not even need to approach a bank for financial assistance to buy a property
WHAT IS ‘GEARING’?
Coming back to your R10 000 worth of shares – if you invested wisely and your R10 000 share portfolio grows by 3% per year, after one year you will be about R300 richer.
“If your property valued R600 000 grows in value by the same 3% per year, you will be R18 000 richer,” says De Waal. “Thus, your return on capital invested (the deposit only of R10 000) is much higher than R300.00
This is called ‘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 the growth as explained above.
“It makes a lot more sense to let a property value of R600 000 grow, rather than R10 000 invested on the stock exchange or with your bank.
If you want to draw money from your share portfolio, you need to draw from your growth or capital, taking you back to square one. Your property, however, still grows in value and does not lose its equity.
“Do your own research to become and expert investor,” says De Waal. “One hears horror stories of brokers who invest clients’ money in a high-risk investments to achieve maximum returns, and then lose most of the portfolio when the share price comes down. The same applies also for property investors who still struggle to be cash flow positive after 5 years of ownership”.
Buying shares – If you go to any of the top financial institution and you want buy shares (even their own shares), they may only lend you R10 000 to buy shares to the value of R10 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 R10 000 and invest in the right property, you can gear that R10 000 deposit using leveraging to secure a property of R600 000.
THE TRADITIONAL WAY: HOME LOANS
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.
You can use your R10 000 as a deposit and apply for a lower home loan, which may assist you to negotiate a lower interest rate with the bank, as you will have a lower risk profile to the bank.
“If you do not buy a property that includes all the incidental legal costs (for example from a property developer) you may need to use your savings of R10 000 to pay for a portion of the transfer legal fees. The fees are usually payable by the purchaser to the property transferring attorney and the attorney who will register the mortgage bond,” he says.
“One needs to also factor in the additional costs of owning a property, such as the 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 cash flow-positive from day one, the rental income absorbs the extra expenses and you are in effect getting your property for free. Once your net rental income has paid you back your R10 000 invested, you will, in theory, have acquired the property for free, and your return is then infinite.”
RESILIENCE IN “HARD TIMES”
The impact of Covid-19 put a brief dampener on property prices, but many in the property industry were taken by surprise how soon the property prices bounced back after property sales came to a standstill during the full lockdown we experienced in 2020.
As per the Lightstone Market Review, National house price inflation was 2.5% as at the end of November 2020. Gauteng is currently growing at 1.4% while Limpopo and Eastern Cape buck the trend growing at more than 5%.
National house prices are still decreasing from the 2.8% annual growth recorded at the end of 2019 but has not decreased as much as expected due to the pandemic.
SAFE AS HOUSES
“It is a buyer’s 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,” says De Waal.
If you have R10 000 to invest in property, you may ask the question: “What is the point? There are no properties that I can buy for R10 000. I will never be able to invest in property as the average purchase price of a property is R900 000.”
You also don’t need R10 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 R30 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 cash flow-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. 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.”
Where does one find an affordably property to buy in the inner cities & close to work?
Many property developers have the vision to provide affordable accommodation in the inner cities.
New property developments takes a lot of time to get off the ground.
The problem is that available development land and opportunities are scarce and if such land is acquired, it is very expensive. The costs of the land then drives up the prices and it is not unheard to be expected to pay up to R30 000 per sq m for a tiny 35 sq m apartment in the CBD of Cape Town or Johannesburg.
Some property developers buy derelict or abandoned buildings, and then often find themselves with a host of expensive legal processes to evict illegal occupiers from such buildings before the can refurbish.
“I recently met with a property group who acquired more than 4 000 sq m of residential space that is occupied by illegal occupiers as part of a bulk purchase transaction.
The costs to develop the vacant land or refurbish the derelict buildings results in very high prices per square meter for apartments in the inner cities”, says De Waal.
Time is the worst negative factor for such property developers.
It takes between 18 – 30 months to plan a new development, commence with construction and/or renovations to be able to hand over an apartment to a new buyer.
Property developers must rely on pre-sales to ensure that the project is financially viable and usually require +/- 75 % of pre-sales before construction commences. This creates further time delays for any buyer to be able to take occupation.
Few buyers, who buy such apartments as an investment or to live in have the patience to wait 18 to 30 months before they can receive the keys to their apartment.
The best solution often is to find a property that is ready for occupation with a tailor-made solution for a property investor.
OPP – OTHER PEOPLE’S PROPERTY
THE OPPORTUNITY – CREATIVE PROPERTY OWNERSHIP FROM R10 000 – WITH NO HOME LOAN REQUIRED FROM A BANK
A property group in Gauteng approached us in early Jan 2021, stating they had some 170 sectional title units available, ready for occupation.
“After many hours of calculations, we found a solution for property buyers to get their foot in the door to own their own property to occupy themselves with the minimum deposit to secure such opportunity”, says De Waal.
Approved buyers will have a time frame of 15 years to pay off the purchase price, and no need to apply to a bank for property finance. They still need to pass a budget and propensity test however to ensure they are able and committed to pay the occupation fee every month plus levies.
Owner occupiers will be given the first opportunity to buy with the “stay to own” concept and then we will accommodate investment buyers, says De Waal, who worked with the property owner to design and package this unique concept.
If you have R10 000, you can buy a property through a Stay to Own product that is similar to rent to own.
OWN YOUR OWN APARTMENT
“A deposit of R10 000 can secure your own apartment to the value of between R515 000 – R615 000.
You live in the apartment and take on the obligation to pay back the purchase price to the property owner over a 15 year period – thus applying the concept of “other people’s property” that assist you to get your foot in the door to own your own apartment.”
STAY TO OWN
“A deposit of R10 000.00 and a monthly repayment of R5 200.00 can secure you a unit of R 519 000.00 to live in yourself.
The same deposit can secure you a unit priced at R619 699.00 with a monthly repayment of R 6 200.00.
The purchase prices escalate every year and is payable back to the property owner over a period of 15 years.”
Levies are also payable as this is part of a sectional title complex.
Added benefits include 24/7 security, free use of a large swimming pool, a fully equipped state of the art gym and an outside communal area with stunning views of the Braamfontein CBD.
The room sizes range between 52 – 55 sqm and are fully furnished and fitted with a mini kitchen.
Depending on the location of the units, the sales prices are from R519 000.00 to R619 699.00.
For more information:
Meyer de Waal
021 461 0065
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)