// LOCALMONEY

Tag: Property

  • Know How Much You Qualify For When Buying A Property

    Know How Much You Qualify For When Buying A Property

    You need money to buy a property

    The name of the game is money – and borrowing is no exception. Affordability should not worry you, and there are a few quick ways to determine if you can afford a home loan.

    It is vital that you remember that no bank will lend you money if you have no money. The bank wants to know you have a stable income and will be able to repay the loan – the bank needs to know that you would be able to afford it. 

    When talking about your money and a home loan, there are normally two things that you need to be aware of: affordability and repayments.

    The first, affordability, is all about how much you can borrow from the bank. Repayments on the other hand is how much you will need to pay back to the bank.   

    What is property affordability?

    Affordability calculations are used to determine how much money you can borrow from the bank. This gives you an indication of how much money you can spend on a house.

    Calculations for property affordability

    They normally first start off with a basic affordability calculation. This entails checking your disposable income. This, in turn, will be used as the amount that you can repay every month. It will then calculate the full amount that you can borrow This is, taking your (gross) income minus all your expenses.

    Property monthly repayments

    Repayments have to do with your monthly payment to the bank.

    Concerning this, be very careful that you do not overextend yourself. You are going to have to repay every month’s a portion of the money that you owe the bank! 

    Repayment calculations

    When you apply for a home loan, the bank will put your money matters under a stress test. Some scenarios that will be explored, include:

    • What would happen if interest rates would rise? Will you still be able to pay back the money?
    • What would happen if you lost rental income?

    Legal and technicalities – blah blah blah

    There are also legal technicalities on affordability and repayments that you need to be aware of – the NCR enforces certain laws on borrowing money.

    You can only pay 30 % of gross income towards property loans. This would mean that if you earn R 10 000 a month, you can repay R 3 000 per month for your property.

    Here’s the kicker: If you have an existing bond on a property (that you will not settle to buy the new one), with a bond repayment of R 1 000 per month, you only have R 2 000 per month to spend on another property.

    To explain this better, let’s look at some scenarios

    Scenario #1

    You earn R 10 000 per month (gross).

    You have no debt.

    Your living expenses total R 4 000 per month.

    You have disposable income of R 6 000 per month.

    You can spend up to R 3 000 per month on a homeloan.

    Scenario #2

    You earn R 10 000 per month (gross).

    You pay R 4 000 per month on credit card debt.

    Your living expenses total R 4 000 per month.

    You have disposable income of R 2 000 per month.

    You can spend up to R 2 000 per month on a homeloan.

    Scenario #3

    You earn R 10 000 per month (gross).

    You no debt.

    You have an existing home loan of R 1 000 per month.

    Your living expenses total R 4 000 per month.

    You have disposable income of R 5 000 per month.

    You can spend up to R 2 000 per month on a homeloan (due to the 30 % rule).

    Conclusion

    Once you know how much you you can afford to repay to the bank, you’re able to combine this with a credit check. This will give you your credit expenses for you to get a better picture about what your finances is really looking like.

    Never lie about your expenses – the bank knows things.

    Always remember the 30 % rule – A bank or financial institution cannot lend you more than 30% of your gross income for repayments every month. In all technicality, you could borrow 30 % from one bank and 30 % from another, if you have the cash flow available.

    I don’t suggest spreading your risk too thin though – this might cause much more harm than good!

    If you are planning on leveraging property, check out my article on emergency funds here – you will need a huge emergency fund for safety!

    Go now!

    Happy investing.

    Helpful resources

    I like using the BetterBond calculator, but that’s just me. You can use the ones from Ooba or another site if you like.

  • Why A Deposit Is Important When Buying Property

    Why A Deposit Is Important When Buying Property

    Let’s get risky with deposits

    It’s not easy to save for a deposit. Often, you sit with a lot of money readily available in a 32-day notice account, whereas this could’ve been invested in an ETF or stocks.

    Yet, when buying property, you must have cash available. 

    Banks have a love-hate relationship with risk. They see risk as a way to justify a high interest rate. This does make sense, as they need to compensate for the risk they are taking by lending money to risky people.

    If you need more info about how to make yourself less risky, check out the post here on your credit record.

    Why pay a deposit?

    When you have the money available for a deposit, you can use these two ways as psychological leverage. 

    The first way is by negotiating a better purchase price on your property. You can tell the agent that you have a deposit of R x, which justifies the lowering of the purchase price. 

    The second option is to apply for the full amount as a loan. Quite often the bank will not give you a 100% loan. Because you have money available, you can pay this as a deposit. 

    If the bank gives you a 100 % loan, you have the opportunity to negotiate with them for the interest rate. Once you received a grant (sometimes called a quote), ask the bank/mortgage originator to negotiate for you again based on you paying a deposit.

    Remember, you need to negotiate the best deal possible when buying and selling property

    How do I save for a deposit?

    It’s so important that you have a purpose when you do something in your finances. This is the reason so many people cannot save for a deposit – they become despondent and discouraged when there’s a lack of purpose.

    Be explicit about your dream. Know what you are saving for.

    The best way to begin is to begin! In short, here are the cliches you already know:

    1. Spend less than you earn
    2. Save the difference for a deposit
    3. Put the money away in a 32-day notice or money market. Don’t put it in your Tax Free Savings Account TFSA or into an ETF – these are for long term investments.

    Conclusion

    Having a deposit is one of the elements that will give you peace of mind on a property deal.

    It gives you great negotiation leverage when buying a property.

    Now that you know about deposits, go now!

    Happy investing.

  • What Is The Difference Between Sectional Title And Free Hold Ownership?

    What Is The Difference Between Sectional Title And Free Hold Ownership?

    So, you want to own property?

    What I can do is I can help you to understand the difference between full title and sectional title properties. 

    When you buy a property, most people want to own the land, the bricks and mortar (including the roof) and the garden. 

    Freehold / Full title

    What is a freehold property?

    So, your family is expanding and you want to move to your own place. You are thinking of buying the house down the street. It has 4 bedrooms  – so your 23 children can have a bit more space – 13 of which were adopted because you are altruistic. They require a garden and a pool – you don’t want to be stuck with them inside 24/7!

    You would probably be looking at a freehold or full title property. This type of property means that you own the whole thing. 

    Pros and cons of freehold property

    The responsibility rests on you for upkeep and maintenance.

    You are in control of your house.

    If the pool has algae the size of McDonald’s hamburgers growing in it, that’s your choice.

    If you want to build an extra room in your house, you just need to submit the plans. Once they are approved, you can go wild and make magic.   

    If you want to add more security, then you can add an electric fence, a fierce dog and a security guard – note that you would need to pay for this yourself!

    Sectional title schemes

    What are sectional title schemes?

    In the second scenario, you and your wife are newly married. You need a small space to call your own. Even though you don’t want to rent, you don’t have the time to do property upkeep. Because you don’t have the time to manage the security, rubbish or gate motors breaking, it’s decided to buy a flat. 

    The flat on the 9th floor. 

    How will you own the land if your property is on the ninth floor?

    So the government created something called sectional title. 

    The term refers to the block,  including the land is seen as one unit.

    Just one. 

    If you buy the flat, you would own a fraction of that – .a part or a section of the whole block. When it comes to freehold, you own the whole thing, you own the house, and you also own the land.

    No property, not even sectional title is without maintenance. Someone has to pay for the gate motor. Someone needs to pay for the floors to be cleaned and the garden to be kept. As everyone is responsible for the bills to keep the block in good condition, everybody is responsible for paying. These fees are called levies.

    For a freehold unit, the owner needs to pay and manage all of this. For a sectional title, the body corporate will collectively be held liable. 

    Trustees and the body corporate

    You can imagine that managing this becomes a nightmare – if everyone owns a piece of the pie, how will this get managed? 

    In short, the owners (legally known as the body corporate) will select a few people to represent them. These will be called the board of trustees. For more info on trustees and the body corporate, check my article here. 

    The cool thing is that you just need to pay your levies, and the board of trustees/managing agent will make sure that the money goes to solve the issues at hand.

    Pros and cons of sectional title

     In sectional title schemes, you have certain areas that you don’t own yourself. These are called communal areas. It includes the pool, (sometimes) the gardens and corridors. The body corporate need to take care of this – and you can often get the benefit of using this.

    The trustees will hire the right people for the job – if anything does go wrong, they will be notified and will help sort this out. For example:

    • If the electricity goes off for the block, these people will hire the right person to check what’s going on and resolve it.
    • In the scenario that a pipe bursts on common property, the trustees (or caretaker) will sort it out
    • All security outside your unit is the responsibility of the body corporate.
    • The pool and gate motor is not your problem to fix or maintain
    • Legally, any sectional title block needs to have insurance. This needs to be paid from levies.
    • Some blocks even come and pick up your rubbish just outside your door, which is really awesome!

    On the other hand, there could be issues due to the closeness that your neighbour lives to you. They can hear your arguments and disagreements. 

    Sometimes you need to pay special levies – this would be for something like an unexpected emergency expense like there was a nuclear explosion and all the water pipes in the block burst. 

    The fact is, in freehold, you would also need to pay that.

    Conclusion

    With freehold you own the land, the roof, the garden and everything – the whole unit.

    With sectional title, you do not – if you’re on the 9th floor, you own the section of your flat (and sometimes the parking spot too!).

    Both are awesome, and have a place in your property portfolio.

    So now that you understand about freehold and sectional title – go now!

    Happy investing.

  • What Is Sectional Title And How Does It Work?

    What Is Sectional Title And How Does It Work?

    Trust in the body corporate of sectional title schemes

    Understanding sectional title properties shouldn’t be complicated. 

    Big terms like body corporates and board of trustees shouldn’t scare you.

    Though it sounds like I am making up words as I go along – if you plan to invest in property, there is a big chance that you will be looking at buying sectional title property first, before moving on to freehold properties. 

    Sectional title

    Sectional title is a legal term where people own a section in a block of flats. Your section might be limited to a flat (or house or duplex unit) – and might include or exclude a parking spot.

    It differs from freehold property in the sense that you often don’t own the land – how can you own the land if your flat is on the ninth floor?

    Within a sectional title scheme, there are some big words that you would need to understand in order to know who owns what and what each person is responsible for:

    • Sectional ownership – your flat, which you paid for is your section. This is not to be confused with fractional ownership. Fractional ownership would be where 10 people together own a percentage of a flat
    • Common property – The stairs, pool or lifts are not owned by one flat, but by all the owners collectively.
    • Some areas are common property with exclusive use – this might include your garden, parking spot or similar. It means that you have exclusive use of that section, yet the land is technically common property.

    The body corporate

    It is culturally acceptable to blame everyone else for things. For this reason, the government decided to rename ‘all owners’ of a sectional title scheme to the ‘body corporate’. 

    Though owners would vehemently deny this, it’s true that when you buy a flat in a sectional title block, you are becoming part of the body corporate!

    As an owner, you own a share in the body corporate – in sickness and in health. In wealth and debt.

    Some body corporates are more than a group of blame-shifting investors – many bring innovation and interesting solutions to problems such as safety and security, handling cash, day to day maintenance and generating cash flow. 

    I have seen a body corporate find innovative ways to supplement their income. I know of blocks that created an extra flat on common property that they rent out or/and offer the space on the roof for rent to mobile phone companies to place/install their aerials. 

    Fees and levies

    Seeing that all owners take responsibility as the body corporate, everybody needs to contribute some money.

    This is where levies come in.

    Somebody needs to pay for the garden.

    Somebody needs to pay to make sure that the fence is kept in good condition.

    Levies are calculated by using the total expenses as the guide. The following could influence your unit’s levies:

    • Size of the unit – larger units will have higher levies
    • Number of units in the block could mean lower levies

    The following can influence the amount you pay for levies:

    • Emergency fund reserves
    • Unplanned and emergency situations can call for special levies to be needed
    • If maintenance is needed, the levies need to cater for it
    • Utilities – If NERSA decides to give Eskom another 50 % increase, it will also affect your levies, as many common areas use lighting, electric fences and electric gates.

    If you’re interested to learn more about monthly fees you need to budget for your investment property, check my post here.

    The annual general meeting (AGM)

    So 200 people need to take responsibility for what happens to their investment.

    To make this easier, there is a yearly meeting for all the owners. 

    This is called the AGM (annual general meeting) – recently also called the yearly general meeting.

    Before this meeting happens you will get a big envelope in the mail which will include:

    • Audited statements (these need to be approved by the body corporate at the meeting)
    • Letter from the chairman of the board of trustees (better known as the trustee report)
    • The 10-year maintenance plan
    • Updates about maintenance, legal aspects and other factors about the block
    • Proposed levy increases

    The following needs to be remembered during the meeting:

    • A quorum (33 % of all owners, if there are more than 4 owners) needs to attend the meeting to make it a legally binding meeting
    • The owners together will need to approve the previous meeting notes and financial statements
    • Owners with outstanding levies are not allowed to vote.
    • An owner can give you a signed form so that you can represent them. This is known as a proxy. Check here for some legal info on this.

    If you own a flat in the block, it is in your interest to make sure that you attend these meetings.

    The board of trustees

    You can imagine that having 200 owners makes admin a nightmare! 

    To simplify this, the body corporate needs a few people they can trust to represent them.

    At the AGM, the body corporate will vote for a small group of people (normally between 5 and 7) who the body corporate (owners) authorise to make decisions on behalf of the block. 

    These people are called the board of trustees.

    They will often get orders from the owners at the AGM to look into certain issues such as parking or security. 

    The board of trustees will need to:

    • Look after the common property – or hire someone to take care of it. This includes
      • Gardens
      • The exterior of the building
      • Lights in common areas and water connections
      • Security, gates and fences
    • Make decisions on how to handle people that don’t pay their levies:
      • Oftentimes I will ask a lawyer to go  – on behalf of the body corporate – and collect the money following legal routes.

    If you can be on the board of trustees, it will be hard work, but you will know what’s going on in your investment – and you will have a say about how these things will be handled.

    Trustees and new sectional title schemes

    If the properties are newly built and a board of trustees have been selected, they will be tasked to do a few things, which include:

    • The board of trustees are ordered to create a bank account so that levies can be paid into that.
    • It also needs to establish insurance for in-case the block burns down or is damaged in some other way.

    All existing blocks should have these in place already.

    Managing agents

    Most sectional title schemes opt to hire a managing agent. The board of trustees appoint a managing agent that will manage the sectional title scheme’s finances, levies and general management. This frees up the trustees to focus on management, more than the nitty-gritty.

    Managing agents tend to have a very good understanding of sectional title law.

    Just remember, no one works for free.

    The aim is to make money. And everyone wants some. Managing agents charge the owners directly for:

    • Sending SMSs and letters to owners who are in arrears with their levies
    • Sending communications about disturbing the peace or breaking the house rules of the body corporate

    They will also charge the body corporate a management fee. Often times the managing agent will offer a full package with auditors, hidden fees, maintenance staff, cleaners and every possible thing that they can make money from you.

    It’s the responsibility of the board of trustees to ask questions about the fees and costs.

    I know of a block that recently fired their managing agent. There was a water leak for a few months. The managing agent didn’t raise alarm bells and paid the municipality the full amount every month. It cost the body corporate their full emergency fund of R 1 million!

    It’s important that the trustees and the body corporate monitor to make sure that the amounts are worth spending.

    Conclusion

    You become part of the body corporate when you buy a property in a sectional title scheme

    At the AGM all the owners will elect a board of trustees who will represent the body corporate.

    It’s in your interest to attend these meetings.

    Please pay your levies – don’t be a  ****.

    Now, with your new gained knowledge – go!

    Happy investing.

  • How To Find The Best Tenants For Your Rental Property In South Africa

    How To Find The Best Tenants For Your Rental Property In South Africa

    Killing my investment softly with this tenant

    One of the most well-known strategies people use in South Africa is called buy to rent. You can buy a property and then rent it out. The idea is simple – you buy a property and you rent it out. When you do your analysis of an investment, you should consider the strengths, weaknesses, opportunities and risks. 

    Tenants seem to fit right into the risks factor.

    Many people stop investing in property due to rational lies (pronounce this rationalise) – what if the tenant doesn’t pay? What if they break my house? (Note to the reader – insert more absurd questions here)

    This does sound a bit like some retarded love song. Many people further claim that ETFs and stocks do not have these issues – which is true. If those issues arise, they just don’t get any returns (dividends or share price increase). Righto, but back to the property tenant issue – I have finished my rant and rave about people dissing property. 

    In this post, I want to focus on how I find the right tenants.

    When you rent property, you have two options. The first is using a rental agent, and the second is doing it yourself.

    The Beginner/easy option: using a rental agent

    The biggest mistake I see in inexperienced property investors is that they try and save on costs by managing the property themselves. This causes quite a bit of a headache, as they do not have the experience to know a good tenant from a bad one. 

    If you are looking for a good agent, here are some pointers:

    How will I know if the rental agent will do?

    • Spend some time with them in a meeting to check them out – remember business is like getting into bed with someone. You need to know a bit about them before you do!
    • Ask them how they screen tenants – this is brilliant for if you want to manage it yourself in the future, as then you know what to look for
    • Let them explain how they handle a tenant not paying – again, this will broaden your knowledge
    • Ask them if they are certified anywhere or have any qualifications in managing tenants and properties
    • Enquire about fees – many rental agencies will charge the following fees:
      • Finding a tenant – this can be anything from R 1 000 to a month’s rent.
      • A monthly management fee – this is anything from 5 – 10% excluding VAT – because they want your money for doing very little.
      • Inspection fee – this again differs, but in my experience is roughly R 300 – 1 000. The agent will walk through the property with the tenant (as per the legal requirement) to confirm that all is in order – and create a snag list about property issues. They will also do an exit inspection and some even do an annual inspection.
    • How will your agent handle breakages – e.g. when the geyser burst or the tenant complains about a leaking tap? 
    Notes on managed rental properties

    I want to make it clear here – I have some properties that are managed by rental agents. Some of them are good and will give you good insights into the business. Your goal here should be clear – learn all you can from them and have control over your investments. 

    Rental agents also know what market-related rent is. You don’t want to undersell yourself!

    The hands-on option: Do it yourself

    A lot of people would complain that the tenants don’t pay when you manage it yourself. This might be true, but it’s also about your experience. It is also about knowing which tenant to allow to let your property. You don’t want to just let anybody in your house, would you? 

    If you do want to rent the properties out yourself, you have two options: the first is doing an unmanaged lease through a rental agent, and the second is doing it all yourself.

    For an unmanaged lease, you ask your rental agent to find you a tenant. You instruct them which checks to perform and how to screen them. You would need to pay them a fee – this is normally one month’s rent once off. They would then give over management to you – the tenant will contact you in case of an issue and pay you the rent directly to you. 

    If you want to do everything yourself, you are required to advertise the property, show the property to the potential tenant and manage all the inspections yourself. 

    Let’s say you advertise on Facebook, and have someone willing to take the property. Here is my list of non-negotiables:

    Credit check those people!

    Do a credit check on them. If you do a credit check on them you can see what the score is and if they’ve got any outstanding loans if they have money they owe people and they haven’t paid. I would not let them in my property because I don’t think they will pay what they owe me.

    You can use free services like ClearScore or Lucid, or paid services like TransUnion or Experian.

    Consider also doing a check with tenant networks. An example is TPN – they have great records of tenants and feedback from previous landlords and rental agents. 

    What if the person does not have a South African id? Well, this is on you then. The bank statement and references should be enough – you will need to use your judgement. 

    Proof of affordability

    No one in the personal finance community would be true to himself without asking for bank statements and/or payslips. Why do I do this? Well, It’s partly due to interest, and partly due to making sure the tenant has been paying his previous landlord on time for the last 3 months. 

    I currently have a tenant in one of my flats that’s earning more than me. 

    He also saves more than me.

    And he pays on time.  

    References of previous landlords

    Have I ever called a reference? 

    Nope.

    Is it a requirement? 

    Yes.

    I find this to be like a sifting parameter. If they are not willing to give me the previous landlord’s details, it would mean that there’s something very wrong. Very, very wrong. 

    A face to face meeting

    Though this one is strange, I like to show the tenant the property. I have learnt over the years what to look for when looking for a tenant. I look for the following signs:

    • Presentability: Do you look like a slob who will destroy my property?
    • Are you a complainer? I don’t want someone complaining about the amount of light that enters the room from the windows, and stop paying because of this.
    • Previous renting: I tend to ask one or two questions about why you are moving and your relationship with the previous landlord. This gives me a great idea on what to expect. 

    Examples of what to avoid

    I tend to start the message like this:

    “Hi there, it’s still available. You’re more than welcome to come to have a look at the flat. We would require a 1-month deposit, a credit check (which we will pay for) and references of previous landlords.

    Feel free to contact my wife … …. For a viewing.

    Here are actual quotes of what I heard from potential tenants:

    • “My credit record is shot. That I can tell you upfront. And the only ref i have is my cousin i have been renting from”
    • “Would be nice if we agree I can move in today.”
    • “I am under debt review though. But i can afford rent have been renting a.place but it became tooo expensive. We enden up paying R … Will that be a problem?”

    Dear friend – you will not be renting my properties!

    Conclusion

    A Property, like any other investment, needs to be managed. 

    The level of control over your investment needs to be decided by you. 

    Choosing a tenant is vital for success in the property industry. 

    Choose wisely by either using a rental agent or self-managing.

    If you’re self-managing a property, make sure you do a credit check, get bank statements and ask for references. 

    Now, go and do what you need to do.

    Happy investing!

  • The Ultimate Buy-To-Let Guide For Investment Property

    The Ultimate Buy-To-Let Guide For Investment Property

    So you want to invest in property, right?

    It is a lot simpler than you think. Look you need some things like you know you need some form of income because nobody will lend you any money if you don’t have any income. 

    But there are some cool strategies that I would like to share with you that you could consider on your journey. 

    One of the most well-known ones people use in South Africa is called buy to rent. They buy the property and then rent it out. 

    What type of investor are you?

    Some people find property investing a bit intense and a bit too involved for their liking. It’s quite a bit of work to be honest, you know – and most people don’t like that!

    In this you have a choice: are you the involved investor or are you the silent investor? 

    If you are the silent investor, you would prefer to have your property managed by a rental agent –  at a cost of course! 

    If you are the involved investor (a control freak like me), you would want more involvement like being on the board of trustees, self-managing and fixing up the property yourself.

    Safeguarding yourself

    Do you have an emergency fund? 

    No? 

    Oh. 

    What would happen if your place needs a new coat of paint? 

    What would happen if your tenant doesn’t pay for two or three months?

    Your life will be over soon. 

    Or you could get an emergency fund in place?

    I suggest having 5 months of property expenses saved in your bond. If you don’t know about emergency funds, check out my article here. 

    Another thing that you would need to consider is that you would need life insurance in case something happens to you.

    It’s also one of those things that oftentimes the bank would require from you if you’ve got a mortgage on your home that you’re renting out. There’s a lot that you can deduct from tax and all of these things make it quite worth it to have property.

    The crux strategy for buying to rent in South Africa

    When you buyin to rent, you want the tenant to pay for the property. This means that your rent should go to cover your bond and other property expenses.

    To make it profitable, I work in a 1 % rental factor. For example, if I paid R 400 000 for the property I want R 4 000 a month. Ideally, I would like R 4 000 a month in my pocket every month after the levies, rates and taxes have been deducted. But you don’t get those every day.

    In the beginning, you might find that your expenses are not covered completely by the rental income. You will thus have a shortfall. This is the amount that you need to pay in from your pocket. 

    Tax

    The idea with the strategy would be that you need to stay tax neutral for as long as you can that you don’t need to pay tax and the person that actually rents the property from you pays off your property if there’s a difference between the rent that you’re getting and your expenses.

    Remember your rent is seen as income which means that all income you need to declare to SARS – but you need to declare all expenses as well. Remember that the following are deductible:

    • interest that you’ve paid to your bank for the tax year. Your bank will give you a letter with all the calculations, figures and numbers.
    • Your levies, rates and taxes 
    • Any trips to the rental property and costs like painting, plumbers and fixing up are tax-deductible.

    Many people decide not to actually do the right thing and actually declare everything. But I do suggest doing the right thing and declaring what you need to declare. 

    Do the calculations yourself

    My suggestion is to open Excel and calculate, calculate, calculate! Make sure that you’re getting a good deal – you make your profit when you buy, not when you sell. Here are some considerations in your calculations:

    • Be sure to include your transfer costs your bond costs and all the other fees which you will find in this post here. Please make sure that you calculate accurately as much as you can and play devil’s advocate. What would happen if the tenant doesn’t pay for six months?

    Conclusion

    Residential property is awesome and there are a lot of opportunities there. If you’re into investing in a residential rental property or even if you’re not – it’s not that difficult to get into. 

    In simple terms – you need to attempt to stay tax neutral by letting the tenant pay off your bond. 

    Deduct everything that you legally can deduct from tax. 

    Do calculations. Make sure that your investment is worth it before you buy!

    Make sure that it’s a good tenant that you place in your property (check my post here on good tenants) – good tenants are worth giving a bit of discount!

    Now, go and make some good investments.

    Happy investing!

  • What is the difference between a home loan and a mortgage?

    What is the difference between a home loan and a mortgage?

    So, do you think you have a home loan?

    A home loan is not a home loan is not a home loan

    Not that long ago, someone on Twitter was claiming that there’s a difference between a home loan and a mortgage. As I am well-connected in the property industry, I called up my contacts to ask. 

    The issue here seems to be that (in South Africa) the terms are used interchangeably by all parties involved. I thus initially thought this was the same thing. I was, however, rudely awakened by the final answer I received!

    For this post, I will call the one ‘traditional mortgage’ and the other one ‘home loan’. For the most part, the semantic distinction is not found in the industry – likewise, neither do most consumers know there’s a difference!

    A traditional mortgage

    Traditionally a mortgage is provided by one of the big four banks. They have special divisions that specialise in mortgages for homes. Here are some of the ways this is set up:

    • When you take out a mortgage on a property, there will be an initial bond initiation fee. This will be added to your loan account at the bank. The amount is normally between R 4 000 and R 5 500. 
    • Your interest will be accrued daily. This means that if you borrowed R 1 000 000 for your property and have an interest rate of 10%, on the first day, the amount of R 273.97 will be added daily as interest. You will pay off the amount in monthly instalments
    • If you want to pay off your mortgage early, you can transfer more money into your mortgage account. If you do this, you will only pay interest on the outstanding balance.
    • These accounts are often flexible – you can add and withdraw your extra money as you see fit, saving you money paid on interest.

    The other ‘home loan’ …thing

    But hold on – why can only the big four banks get all the money?! Surely we can spread this thinner and create more competition. This is where other loan companies decided to step in. Many companies that traditionally only did car loans created a product that they brand as ‘home loans’. Here are some of the ways this is set up:

    • When you get a home loan from one of these companies, there will be an initial initiation fee. This will be added to your loan account. 
    • The full 20 years of interest will also be added in advance onto your account on day one. This means that you will be paying off the full amount in monthly instalments from day one 
    • If you want to pay your loan off earlier, you will need to contact the company, deposit the money in the loan account and let them recalculate the monthly amount based on the lump sum that you paid in. 
    • You cannot withdraw the lump sum that you ‘saved’ from this account.

    How will I know which one I have?

    The short answer is to ask. Ask your loan provider to give you more information about how your loan and repayments are structured. If you have your loan through one of the big four banks, it should be a mortgage type loan.

    If your loan is through companies like Sentinel or BMW Financial Services, then you probably have the latter home loan ‘thing’.

    Given these points, it becomes clear why I favour the traditional home loan. It allows more flexibility for paying back the money and doesn’t psychologically make you feel like you’re owing the bank three times your lending amount. It will also make it possible to pay it off faster, pay less interest and put your emergency fund in the account until needed – but that’s just me. 

    Conclusion

    The semantics get in the way of properly explaining the difference in the structure of what I call in this post a “mortgage” and a “home loan”.

    You might remember that I wrote an article on bond costs – these costs I have done for the traditional mortgage. You can find the article here.

    In conclusion, it’s important to ask about the terms and conditions of your home loan.

    If you’re not sure, ask how your repayments will work – what would happen if you wanted to pay your home loan thing/mortgage off earlier?

    So now – Go! Go! Go!

    Happy investing! 

  • How to use Section 13sex in the income tax act as a tax break

    How to use Section 13sex in the income tax act as a tax break

    S.E.X.! The thing everyone does and no one talks about! Section 13sex! The consequences of this law are almost as much as just sex! If you’re not excited about this, then you should be!

    What is this Section 13sex that you are talking about?

    This section in the tax law was written to help long term property developers and investors stay invested in the industry, and get rewarded for their investment. 

    To be explicit in what this is – it’s not free money. It’s merely tax breaks that you will get if you stay invested in the long run. 

    If you’re excited about long term property strategies, then this is for you.

    If you want to read the law, here is the link for it.

    The numbers:

    As previously mentioned, the owner of the property will get a tax break for each new property they own. There are two types of people who will be able to get the tax break: the property developer (someone who built the property) or the person buying it from the developer.

    • A property developer can write off 5% per year (for 20 years) of all new and unused residential units against tax. This means we will get the full 100 % back of his investment in tax breaks.
    • The law also makes provision for new and unused improvements to existing buildings. For this, 30% of the property value may be claimed back over the 20 years. 
    • Buy to let investors can also claim, but only 55% of the price they paid for the unit.

    How to qualify for it

    • You must own at least 5 properties in South Africa. 
    • The properties must be new or unused – this is a technical term for either you built the property yourself (you’re a property developer) or you bought it new from the developer
    • You must treat your properties like a business –
      • You cannot live on the property. 
    • These must be residential properties
      • As you need to treat this as a business, it essentially means you need to rent out the property and people need to live in the property
      • This does not apply to workaholics like myself that live at work. 

    Parameters and limitations:

    • The tax deduction is limited to the actual cost or the market value – whichever one is less.
    • You cannot stack your tax credits – if you claimed tax breaks under the income tax law on the property already, you cannot claim again
    • An extra 5% can be written off for low-cost houses – making this 10%
      • This is defined as properties worth less than R 350 000 and a rental factor of less than 1% of the property value. 
    • 5% can be claimed even if the building is acquired on the last day if the tax year

    What is the catch?

    If you think this sounds too good to be true, then you are right. The government is out to do two things: stimulate the economy and make sure your money stays locked in. This is done by giving you the tax break – but if you try and sell the property before the 20 years is over, you will be liable to pay back the tax breaks. 

    If this makes you cry, then don’t worry – it makes me bleed from all my orifices all at the same time. 

    Examples

    The best way to illustrate the tax break is with some awesome examples:

    The simple everyday example

    The scenario:

    An investor purchases five new residential units at R1 000 000 each.

    Basic Calculation:

    55% × (R 1 000 000 × 5) = R 6 000 000 (Cost of the 5 residential units)

    R 5 000 000 × 5% = R 250 000 per annum (Allowance under section 13sex(1))

    The complicated low-cost example

    The scenario:

    Company A acquired 6 new and unused apartments in a building at a purchase price of R320 000 each. The building, which is located in South Africa, has 30 apartments which are all used for purposes of residential accommodation. Company A has let the 6 apartments at a rental of R3 200 per month. 

    The result: 

    Company A will qualify for the allowance of 5% under section 13sex(1) equal to 5% of the cost of the residential unit. Under section 13sex(8)(a) the cost of a residential unit representing part of a building is deemed to be equal to 55% of the acquisition price.

    Basic Calculation:

    55% × (R320 000 × 6) = R1 056 000 (Cost of the 6 residential units)

    R 1 056 000 × 5% = R52 800 per annum (Allowance under section 13sex(1))

    Additional allowance for low cost:

    An additional allowance under section 13sex(2) may be claimed as the apartments qualify as low-cost residential units: 

    R 1 056 000 × 5% = R52 800 per annum

    Conclusion

    Before you get too excited or too terrified – remember that you need to invest for the long run. It’s the same for stocks, bonds and other investments. 

    Don’t invest in just any property. Make wise decisions on where to invest.

    Learn as much as you can and don’t be reckless.

    Happy investing!

  • Things you need to know when investing in property

    Things you need to know when investing in property

    Property as an investment vehicle

    Property. The thing people live, work and play in. 

    It is building or land – and people attach value to certain properties to be valued more than what the place costs to build.

    I am sure I would not need to explain that we get industrial, commercial and residential property (and farms!) – and that each one comes with its own investment strategies and own pros and cons. 

    Please look at this article as an introduction to property investments. 

    Types of property investment strategies

    We all know that property tends to fall in one of four categories: residential, commercial or industrial and farms.

    Each one has its own pros and cons, but in general, the idea falls into one of the following categories:

    • Buy to let – buying a property to rent it out to tenants – more info here.
    • Buy and flip – Buy a property and sell it almost immediately. Often times some renovation is done to make the property more valuable – more info here.
    • Renovate to hold – A property is bought and renovated to be rented out or used for a purpose.
    • Repurposing – A house can be bought and renovated into a commune or separate flats.
    • Property development (active or passive) – money can be invested in a property development, or you could be building a new development 

    For more details on property investments and strategy for profitability, check my other post here.

    The pros and cons

    As with all asset classes, real estate has some interesting pros and cons. Here is a small list of all the pros and cons:

    The pros

    • Property is a physical thing and not a paper asset – this means it’s not something that could easily become worthless like Steinhoff shares.
    • You can leverage property – you can rent it out to someone who will pay off your bond for you. You would need to pay a minimal shortfall monthly too gain the property in its entirety 
    • You a lot of full control over your investment – you decide what you spend money on (e.g. upgrades)

    The cons

    • Property is often a hands-on type of investment. You will need to be involved in managing the block and tenants (if you don’t have a managing agent) 
    • You need a big ‘evil tenant fee’ in case the tenant destroys your property or is vacant for a month (or a few months)
    • Property is often times undiversified – you sit with a large amount of money in a single space. This space is in the same country, in the same asset class and in the same currency. Make sure it justifies the risk!
    • Property is as liquid as stone: It’s not as easy as e.g. US$ to swap your property for money, i.e. sell it. 

    Quick tax overview

    This article is by no means tax advice
    Please speak to your tax advisor for your specific needs and analysis

    Tax neutrality

    If your property is bonded and you are renting it out, you are often able to keep yourself tax neutral. This is achieved by the expenses and income being the same. Here’s a quick formula:

    income – expenses = 0

    Note that you should add all expenses for your property, including the interest you pay to the bank, levies, taxes and maintenance costs. This should make your property (especially for the first few years) be non-profit making. 

    You can gain a property by paying in a minimal shortfall in every month!

    Payable tax

    Buy to hold

    If your (provable) intention is to hold the property, you would need to pay tax on your income – i.e. rental income. This is taxed on your normal income tax rate. Note that you should declare all expenses as well – it’ll save you money!

    If you do decide to sell this property, you will need to pay capital gains tax on your profits.

    Flipping

    If your intention is to buy and sell the property with a quick turnaround time, you would need to pay tax on your profit. This is taxed on your normal income tax rate. Note that you should declare all expenses as well…!

    Ways to invest

    The most obvious way you can invest in property is buying one. 

    Many people don’t like the checklist and the admin involved. For those people I have the below section for REITs and Property ETFs.

    REITs and property ETFs

    If you can think about it, then there’s an ETF for it. A physical property is not the only way you can invest. You can invest in property ETFs and REITs as well.

    REITs (Real Estate Investment Trust – REIT (pronounced ‘reet’)) are property companies. They have a substantial amount of properties, and you can buy ‘shares’ in their company. This will often be a bit more diversified than someone buying a few flats. Note that there will be more fees involved in managing the properties, so be sure to ask about these!

    Property ETFs invest in property companies. They have certain rules to which they need to adhere to. Think of it like a basket. The rules determine which shares will be in that basket. If some rules are not adhered to, the share will be chucked out of the basket (sold) and another one that adheres to the rules will be bought. 

    In a follow up article about shares and ETFs I will discuss these a bit more!

    Conclusion

    Remember that not all property are equal. 

    Yet, there is no such thing as a free lunch. 

    Note that though there’s a lot of negativity about property on the internet, many people make serious money from property. 

    I personally believe it boils down to what you know – if you know a lot about something, it’s less risky for you to invest in it.

  • How to negotiate rent with your landlord

    How to negotiate rent with your landlord

    Negotiation only sucks if you don’t know how to negotiate

    When I was on my honeymoon in Vietnam, I was in a  market and was left to negotiate for a fake leather wallet. I ended up paying R 230 for it – and I know it was worth closer to R 50. My negotiation skills were – put politely – poop. I overpaid and felt sick after that. 

    The property market is so similar. When you want to rent, you can negotiate your rent, deposit and terms of the contract. Depending on your current financial situation, you might be able to negotiate the fees, rent and deposit down substantially to make it a good deal for you.

    I want to stretch that all negotiations should be done in good faith. Remember that honest people don’t do business with dishonest people. Therefore, make sure that you don’t disappoint your landlord after heavy negotiations.

    Confidence and assertiveness

    So often we feel inferior and like we have no power to exert. We want to buy this property, but we feel it’s a take it or leave it deal. 

    The rental agent plays hardball

    The landlord claims that there’s a queue of people waiting to take the place.

    The terrible and great thing is that this is the way the industry works. People want to add pressure to get a good turnaround time and make money. Yet, this does not mean that you cannot fake your confidence.

    As an example, a few years ago I offered very low rent on a property. I knew that the place was worth slightly more and the estate agent confirmed this. He even told me that I was crazy and that the owner turned down an offer for more than that! I responded by saying that it was his responsibility to take the offer to the landlord – which he did and she accepted. 

    How do I get that confidence?!

    Wave a magic wand and have it! Apologies, but no – it’s never that easy.

    There are many articles on the web that explains confidence, but I would like to draw your attention to a few things that I believe will help you with this:

    • Get knowledge: Learn all you can about the area, property and the industry
    • Call a few estate agents and rental agents so that you know what you are getting yourself into
    • Bluff – yeah, make a lower offer and if they decline you can always make a higher one. 
    • If you are planning to buy, get prequalified by a mortgage originator who will do all the necessary checks to confirm affordability and credit checks.

    Points to negotiate on

    Tenant vs landlord negotiations

    Landlords love tenants that pay on time. If you are the tenant, remember that you are able to negotiate your rent. we negotiated our rent some time ago. Here’s the story: 

    We wanted to rent a place near Sandton in Johannesburg, but the rent was only for the filthy rich. We found a place that was safe, yet the garden looked like someone vomited in a desert – and let it rot for a decade. We negotiated our rent for a lower value with the following conditions:

    • We will fix the garden and plant veggies 
    • We will paint out the interior of the house at our cost
    • The rent will be x lower than their offered amount

    They took this, and we were able to save a fair amount of money for our time there. 

    Here are some ideas when you negotiate as a tenant for lower rent:

    • Negotiate for less rent if you’re willing to fix up the place, e.g. paint it, fix the garden, etc.
    • Sign a 2-year contract and negotiate the rental increase with this
    • Explain that you will be willing to pay every month on time –
    • Have references of previous landlords at hand.
    • Have a good credit score – many rental agents will check this and blacklisting checks. 

    If you are the landlord, I have a story for you as well! I recently had a tenant that gave notice. Rent was always paid on time. To get a new tenant to replace him I would’ve needed to spend quite some time and money on recruiting and fees.

    I thus made an offer to the tenant to reduce the rent (that would cost me less than the fees for a new tenant) to accommodate him. I know he pays his rent on time every month, so why would I want to lose this tenant? 

    Negotiating your rental deposit

    Many times people don’t have a deposit for their rental property. I would generally see this as a red flag. However, I have also seen honest people fall on hard times.

    Remember that the deposit is negotiable. In your negotiations, you can ask to pay it off over two or three months. Always be honest and upfront with regards to why you want to do that.

    Conclusion

    Negotiate realistically. Remember that you’re not the only one that wants to benefit from the deal.  – it’s a two-way thing.

    In the property industry, you should negotiate your rent, purchase price and even the amount that you want to sell your property for. 

    I live by the philosophy of “If you don’t ask, you will not receive”.

  • Are You Looking For A Cash Flow Or A Kruger Rand Property?

    Are You Looking For A Cash Flow Or A Kruger Rand Property?

    Deciding on a property strategy

    When deciding on a property investment strategy can be overwhelming. It can also be daunting when you think that the only way to make money with property is rental income. Rest assured, this post will give you a few things to consider and end off with links to all the property investment strategies I have researched!

    Before we dig in, let’s look at some myths about property investment first.

    Property profitability myths

    • Property cannot give you the returns stocks can
      • You make your profit when you buy, not when you sell. If you invest well, you could pick up a property at minimal cost to you, if any.
    • When you calculate the cost of repairs, maintenance and other costs it becomes unprofitable
      • I include these in my calculations and so should you. Remember those good property investments will have some maintenance from time to time. You don’t have to do maintenance though – many just fix and flip!
    • You will need to pay money from your own pocket monthly as the rent doesn’t cover the mortgage
      • Well, sometimes. It depends on the property you are investing in.
      • You could easily just connect buyers and sellers.
    • Rent and property value will not increase by inflation
      • This is biased, as many many stocks do not increase with inflation either – Steinhoff anyone?
      • Though property can be concentrated, you can still do good research to minimise any risks.

    Choosing your property playing field

    When choosing to invest in property, you can invest in upper class property or in lower class property. They come with their own good and bad things – pick your poison.

    For me, the first choice is between Krugerrand and cash flow properties.

    Property type strategy: krugerrand or cashflow properties

    All property is equal – but some are more equal than others. 

    I personally believe there’s two types of property you can invest in – cashflow and krugerrand properties and a good property investment strategy has a bit of both. Here’s a quick summary of these:

    Krugerrand properties

    • Upper-class suburbs
    • The purchase price is expensive – you get what you pay for
    • small and large properties, but the price is steep per square meter
    • Low rent to purchase price ratio
    • A down payment or a large monthly shortfall is often required
    • Value often increases more than rental income

    Cashflow properties

    • Often situated in below middle-class locations
    • Often the price is competitive or cheap compared to other properties with similar specs
    • Small properties, such as flats, sectional title units and low-cost housing
    • High rent to purchase price ratio
    • A small monthly shortfall is payable
    • Rent often increases more than property value

    To give an illustration of the following, I normally compare my personal properties on a rent to purchase price ratio: If I buy a place for R 400 000, I expect a minimum rent of R 4 000 per month (a 1% rental factor). Often I would actually expect a rent of more than this – as I would prefer my rent to cover my bond and all monthly fees. This is an example of a cash flow property.

    I could also buy a Krugerrand property. I could spend R 1 000 000 on a place that is a bit more upper class, but my rent is only R 8 000 (a 0.8 % rental factor), and my levies and taxes have been deducted yet.

    How long should you be investing?

    Some people like making a quick buck – and exiting their investment before too much time passes. And that’s okay. 

    Some people are more interested in getting capital gain. This means they want cash now. For others, invest in passive income – e.g. rental income every month.  

    Passive income

    • You get paid regularly for not working – e.g. monthly rent for someone living in your flat
    • Low / No involvement with returns, without affecting your capital investment – think dividends and rent
    • Buy to keep – you are not planning on selling anytime soon, thus your taxes are lower

    Capital gain

    • You do a deal to get a cash injection – e.g. buy, fix and flog a property
    • High/moderate involvement to manage your investment until you flip it
    • Your end goal is to sell your investment and use the profits for something else.

    Many people will tell you in old age you need income – which is true, and many people settle for passive income, rather than drawing money from their living annuities. Well, the fact is you will need money then, and I would opt for passive income! But right now, it would be cool to have both. The cycle often works as follows: make money through capital gain, and invest this into assets that will give you passive income. 

    I love passive income, but I do realise that your own money only will not make you retire early – unless you sell both your kidneys, heart and lungs. 

    Cash or loan?

    Most people don’t have the cash liquidity to buy a property without a loan – yet some do.  If you have the cash – well done! If not, well then you need to settle for a mortgage/home loan. But I do believe there would be reasons why you would not want to buy the property cash. 

    Here are some things to consider:

    Mortgage

    • Many fees will be payable – see my blog post here
    • You could deduct fees and interest from tax
    • The majority of the monthly repayment could come from the rent

    Buying cash

    • You generate instant cash flow
    • You only need to pay fees for the transfer attorney, not the bond fees
    • You can reinvest your profits to make more money

    I think everyone wants to pay off properties, but this really depends on your strategy and the time you have left before retirement – If you are very close to retirement, you sort of need to make a plan to get monthly money coming in.

    Fees, costs and other factors to include in your calculations

    Many people do not know where to start when they need to work out if the property profitability. Here are some guidelines that could help you to work this out for yourself:

    • Know beforehand all fees:
      • Monthly fees
      • Yearly fees
      • Possible unplanned costs
    • Take into consideration the rent you will earn, as well as a possible rise in property value
      • You cannot determine by how much property values will climb, but you can look at historical data and compare that with stocks and bonds and other properties. If you have had your property for a while, you can calculate these!
      • Call a few estate agents to get a better idea about market-related rent
    • Calculate how much you need to pay out of your own pocket (your shortfall or deposit)
      • Compare this with other properties and other options that you know well
    • Speak to a tax consultant about the most effective way to pay fewer taxes
      • The best way on this is to have more expenses and less income. Note you should NEVER rent your property out far below the standard – SARS sometimes checks this with audits – and they check all your expenses as well!

    Calculations for investor savvy people

    If you are really tech-savvy and have awesome Excel skills, you are able to work out some of the following:

    • Calculate the annualised return of your property by comparing the amount of money that you would need to pay out of your pocket, and including the rent and the property growth you have had,  minus your expenses of course!
    • work out your ROI over the 20-year term with projected rental income and property value increases. Note to include other fees as well and don’t estimate a rental increase of 10%, this really is rare in the property market!

    Property strategy links

    Here is a list of property strategies:

    I want to mention that combining these property investments with a property tax strategy could be extra advantageous. Have a look at these property strategies here. 

    Conclusion

    I see this post as an introduction to strategically planning your property investment. The most important thing from all of this information is that you need to be hands-on: you need to know what’s going on in your investment. Volunteer to be on the body corporate of your sectional title investments, be included in your neighbourhood watch and speak to many of the estate agents and rental agents in the area to be up to date with the latest changes and news.

    The three most important strategy categories to take from this post is:

    • Property type
    • Term strategy 
    • Financial strategy

    Happy investing!

    Extra reading

  • What You Need To Know Before You Buy Your First Property

    What You Need To Know Before You Buy Your First Property

    Tips and tricks when you’re ready to buy your first property

    If you have no idea where to start with property
    If you’re looking for info on starting from scratch, i.e. you have no idea where to start, check out my articles here.

    You’re a first time home buyer and you’re in the market for top tips and tricks. 

    You have done a pre-qualification. 

    You’re looking for your property.

    You want to buy it.

    The basics

    So, you’re in the stage of your life now where you’re actively searching for a property. You want to get a good deal, yet you also want somewhere to call home. With an overwhelming amount of information and things that need to happen, I’ve broken down my tips to the following:

    1. Emotional connection tips
    2. Money tips
    3. Bond tips

    On a more technical level, there are a few things to consider – money, investment quality and emotional involvement. In this post I would like to look at emotions and money – a follow-up post will be written on the investment aspect.

    Do you need that ‘feeling’?

    I think dividing the line between emotional and financial decisions is challenging, and sometimes downright impossible. Most people buy on emotion – they see a car they like and buy it and afterwards justify their actions to themselves. 

    This is called cognitive dissonance, which is quite normal. I do suggest though that when buying a property that you combine these skills. 

    Personal/emotional Tips:

    You need a connection with the property you’re buying. 

    As an example, my dad found an awesome property on the slope of the Magaliesberg mountain range – he loved it, but decided to do a final inspection before putting in an offer. It ended up that the house was literally sliding off the mountain – all the cracks were covered up and some of the pillars were actually hanging in the air!

    Tips:

    • Check the property out a second time to validate your emotional connection!
    • Feel right about the property – don’t buy something you are not comfortable with!
    • Don’t rush into anything – dream about it, eat over it, sleep over it, talk it through with friends and family.

    Money tips for buying property

    The second part involves money – surely you need to pay for your property with a bond or money you have in your back pocket! Here are some general property money tips when buying:

    • Negotiate the selling price – what do you have to lose?
    • Negotiate things around the house that needs fixing
    • Have money available for attorney costs
    • Budget for advance levy fees and transfer the rates and taxes accounts

    Bond tips

    If you need a bond, this section is for you. You would need quite a few things in order.

    Calculate how much you can afford

    There’s a law that governs that you are only allowed to spend 30% of your gross income on bond repayments per institution – even if you have 50% disposable income, no bank in South Africa will borrow you more than what would cover the above. 

    I prefer using the affordability calculator for BetterBond here because it’s helpful. 

    Note there are quite a few of these calculators, so use the ones you know!

    Make sure you have enough money for bond and transfer costs and other fees

    Remember there will be fees involved in transferring the property to your name. And if you need to get a bond, there are going to be bond costs involved (you can get more info here for a breakdown). 

    I suggest using the BetterBond calculator for bond/transfer cost calculations here.

    Credit score and credit history tips

    Warning!
    Remember that each time you do a credit check, your credit score goes down – so if you plan to do 2 252 credit checks in a week, you might end up ruined!

    I know this sounds silly, but make sure you have a credit history / good credit score. Most estate agents will have contacts to do a credit check, or you can get one from Trans Union. They must legally, on your request, supply one free report per year.

    There’s hope for you, even if you have a bad credit score!

    Most of the people trying to buy a new property have a bad credit score – this could be because of a forgotten bill that didn’t get paid, an outstanding water and electricity account or a blacklisting. According to recent stats I read, 80% can be rehabilitated within 60 days, but most people just give up after discovering their credit score.

    What if you have no credit history?

    Many people are debt-averse – they avoid making any debt, as this equals slavery in their eyes. Although this is noble, you sort of need proof that you can pay back money after lending it – the bank requires proof! There are a couple of ways you can build up a credit record:

    • Companies like Lucid specialises in building your credit record quickly and efficiently – they charge a fee
    • You can open a few store cards and credit cards – I suggest that you buy something you need on the store card, and immediately walk over to the customer service and pay off the debt. In South Africa, this might still work, but in the US this is not valid in their creditworthiness calculations
    • Get a credit card through your bank and always have a surplus on it – this does take some discipline, but it’s worth having even R300 on there in case you would need it – and it builds your credit record.

    Should I use bond originators?

    Use a bond originator – it’s free!
    A bond originator submits your bond application to multiple banks – it’s usually free and they give you all the rates from all the banks for you to consider and compare! The bond originator gets kickbacks from the bank, and thus will make sure your application to the bank gets submitted successfully – or will try everything they can to do so.

    Conclusion

    If you want to get on the property ladder, you need to get your finances in place. 

    Check your credit score, and fix any arrear debts.

    Have money available for the bond and transfer costs.

    So, now! Go! 

    Happy investing!

  • How to manage expenses of your rental property

    How to manage expenses of your rental property

    Yeah, you will need to pay costs

    As you might’ve guessed from quite a few posts on Twitter and other places, I invest in the real estate specialising in sectional title schemes for middle lower-income households. 

    I did a previous post here on hidden costs of buying and selling property, yet in this one I would like to look at your hidden and unplanned running costs.

    Investment rental property has a lot of costs people don’t think about

     If you are renting at the moment, think about these situations: Your geyser burst

    Your stove stops working

    You conveniently ruined the paint job by a roof leaking.

    Your pressure cooker exploded. Oops, the roof is no
    more…

    These things happen! Maybe not today, but it happens. There are some costs that we don’t think about – we plan for levies, but neglect to think
    a bit further than that. This is often due to not knowing the details, not due to ignorance. You know what your income will be roughly for your investment property, but here are some expenses that you might not know about.

    Monthly costs

    Home/life insurance

    Often the bank requires you to take out life insurance when you take out your
    home loan. On the other hand, you might need home insurance as well – whereas with sectional title units the body
    corporate is required to have home insurance – but not for your furniture.

    Tip: If there’s damage on the inside of your property due to something from the
    outside, the body corporate should pay for that, not you – e.g. the flat above yours had a burst geyser and now
    your paint job is ruined.

    Levies

    Yeah, you sort of need to pay a monthly fee for sectional title or boomed off areas.
    There’s also a CSOS fee that you need to pay to make the government rich – the body corporate will pay this and put
    it on your statement. Some complexes include water on their levy statements, some you will need to pay it yourself.

    Tip: Pay your levies – if you don’t pay, legally the body corporates are allowed to add
    interest on any outstanding fees, which often can be up to 30%.

    Special levies and reserve fund levies

    Sometimes things go very wrong – like seriously wrong. And who should pay for it? 

    Yes!

    The government! 

    Which means us. 

    Most of the time they will allow you to pay it off over a few months. With smaller complexes, this could cause some serious issues in cash flow and might affect the maintenance and upkeep of the block if these levies are not paid. 

    It’s really in the interest of your investment that you should make sure you have money available if there’s a crisis.

    Rates and Taxes

    Death, taxes and Cher. These are the three things you can never get away from. These can range from R100 to thousands depending on where you stay – and this is your responsibility, not your tenant’s!

    Gardening services

    In non-sectional title estates and homes, you are responsible for the upkeep of the garden – you could try and move this responsibility off on the tenant (some people write this into the contract, which is not a bad idea) meaning at least you won’t come back to a desert or a rocky horror.

    Annual costs

    As with personal finances, there are some fees you know will probably be rearing its head.

    Make sure you cater to these annually.

    Special levies

    With new legislation that came in just over 2 years ago, sectional title body corporates are required to have a maintenance fund for emergencies. The amount saved is legally regulated, and thus the last two years many levies doubled to get this in place.

    Often this is an amount that needs to be paid as a type of ‘second levy’ to the body corporate. These can sometimes be for making the complex better, e.g. adding cameras.

    Tip: ask your board of trustees for their 10-year maintenance plan so you can know what they’re planning.

    Vacancy due to non-payment or the tenant moved out

    People move out and sometimes you won’t be able to find a new tenant in time. Depending on the demand for your property, the place may be empty for one month in a year.
    Tip: budget for one month every year for your property to be vacant.

    Unplanned costs

    People rape property. This is one of the most important things you need to know about rental property. Does this make it a bad investment? Nope. It just means you need to manage your expectations and your property emergency fund.

    Sometimes the deposit doesn’t cover the damage that the tenant did – how they were able to break the shower out of the wall and turn your bathtub into a material dyeing facility – heaven alone knows! But they do these things.

    And then you need to fix up the place, which takes a month out of your rent as nobody can live there while you are rebuilding the house from rubble found in the big black bin outside your own house.

    Tip: Budget about one month’s rent per year for some maintenance work that might
    happen.

    Unplanned maintenance

    Sometimes life just happens – and properties get older. You would need to make sure you have money available in case you have an issue like:

    • Geyser bursting
    • Faulty electricity issues or stove issues
    • Taps breaking
    • Windows breaking
    • Roof leaking

    I suggest having about 3 months’ rent for this. Available on hand.

    Notes on rental agency fees

    You don’t have to use one, but I suggest this is a good idea for people new to the property world to use an agent. These agencies can charge anything from 4-14% of the rental income for their services. You can also use them to find a tenant for you – they will screen them for you, and then you often 

    have the option for a managed or unmanaged lease – this means you can manage the tenant (which incurs a once-off fee equal to your rent) or ask them to manage the tenant (incurring the above 4-12% fee). Note that many of them use their own ‘premium’ plumbers and electricians to go fix your property when something breaks.

    Warning: We got a quote from their handyman for FIVE TIMES it cost us to paint out the place. So be careful when using rental agencies – they need to make their money as well.

    Conclusion

    You’re running a property business

    Yes. You read that correctly. 

    So keep all your slippies/receipts. It’s your responsibility to file all of these for tax returns.

    In a business (as in your finances) you have monthly costs, unplanned expenses and emergency costs that you need to keep under control – this is to avoid bankruptcy. You might ask if it’s worth it? I would argue that yes, this is – being in control of your finances and knowing where your money is going and how it is growing is exceptionally important in moving forward.

    So, go! 

    Happy investing!

    Final Expense sheet:

    Property ValueR
    Monthly Fees 
    LeviesR
    Rates & TaxesR
    GardeningR
    Rental agency feesR
    Yearly fees 
    Special LeviesR
    Vacant property (1-month rent)R
    Unplanned 
    Breakages and emergencies (1-2 month’s rent)R
      

    Conclusion

    Budgeting for the expenses of your rental property is important – it could financially ruin you. I prefer having 3 months’ expenses on hand for in case something happens out of my control. It might be the stove that breaks, a special levy or something more sinister.

    Though rental property as an investment can be profitable, we need to make sure our cash flow is healthy throughout the bond term.

    Happy investing!

  • Know All The Costs When Buying Or Selling Property

    Know All The Costs When Buying Or Selling Property

    Fees, fees and more fees!

    When I bought the first property, I was so clueless about what to expect with fees. Being as clueless as I was, I asked many many questions to the bond originator and to the lawyers. I think they might’ve thought I am some kind of freak from mars – why don’t I just pay the money and let them do their job? Well, probably the same reason why you’re reading this – I really honestly wanted to know what I am getting myself into financially – in the short term as well as in the long term.

    I am currently in the process to sell one of my (terrible) investment properties – and it seems I am in the same boat – except I am running into so many hidden costs which I was not aware of.

    This is the big reason for writing this blog post: Maybe this can help other people budget better for their home, or investment property with or without a mortgage. I break this up into 3 stages: buying fees, running costs and selling fees.

    Buying fees

    When you buy a property, people need to make money.

    Everyone wants you to part with it.

    Most of your fees you will pay to two attorneys. 

    Bond costs

    Hidden fees tip
    Bond initiation fee: note that the bank will add an amount, normally about R 6 000 to R 7 000 onto your bond as a fee they charge to create the loan and account. This is not payable today, but you need to be aware that this is added to your loan amount.

    If you are buying a place with a home loan or mortgage, this one is for you. The bond attorney is the legal person that the bank assigns to make sure their contract with you is created, signed and maintained. They will get the money and pay it over to the transfer attorney who will give it to the seller. These fees are known as bond costs, and can be broken down as follows:

    • Bond registration fee – this is the attorney fee
    • Bond deeds office fee – this is what they pay to register the bond at the deeds office
    • Postage and petties – they charge this because they don’t use email. This could be variable.

    Transfer costs

    The transfer attorney needs to transfer the property from the previous owner’s name onto yours. They sometimes handle closing the municipality accounts and other technicalities that you don’t think about. Transfer costs:

    • Transfer fee – this is the attorney fee they charge you to do their job
    • Transfer deeds office fee – this is what they pay to register the transfer at the deeds office
    • Postage and petties – they charge this because they don’t use email. This could be variable. This could include things like driving to the deeds office and sending the paperwork backwards and forwards – this could include closing figures from the municipality and from the body corporate of the ‘body corporate’ of a block of flats (i.e. close off the levies due).
    • Transfer Duty – the government charges people a special amount (often a percentage of your buying price) to buy expensive properties above R 1 000 000. SARS update annually and can be found here.

    Other costs

    Remember it’s not only the attorney fees that you will need to pay. You most probably also need to pay fees in advance for the property on a pro-rata basis.

    • If you are buying a sectional title unit, you might be required to pay up levies to 3 months in advance. 
    • For estates, you might be required to pay the estate levies three months in advance.  
    • Though not an immediate cost, it is important to register the property’s rates and taxes in your own name. The costs vary from municipality to municipality.

    Selling your property

    When selling your property, there will be costs.

    You would need to make sure your property is in a condition that deems it legally sellable. 

    Make sure that you settle all arrears fees such as electricity, rates and taxes. If you live in an estate or sectional title block, you need to get your levies up to date, as you would be required to get closing numbers. Make sure that your homeowners’ association fees are also up to date.

    Generally, the fees for selling a property are less than for buying. This is because the purchaser will cover a lot of the transfer costs. 

    Selling costs

    Fees not covered which you would need to cater for include the following:

    • Advertising costs and agent fees – when selling through an agent or a website, the agent will charge a percentage of the cost of the property for their services.
    • Compliance certificates:
      • Electrical certificate of compliance (COC)
      • Gas certificate of compliance (COC) if applicable
      • Beetle certificate of compliance (COC) if applicable
    • Fixing up the property – you might be required by law or by conditions in your contract (the offer to purchase that you signed) to fix up or repair the property
    • Municipal closing figures – you will need to pay the municipality to close your rates and taxes account. This again differs from area to area. I think a good measurement could be about 3 months of rates and taxes. If you have any money left over, this could be put into other uses.
    • Sectional title closing figures: If relevant, the body corporate needs to supply the attorney with closing figures as well. They normally charge a fee for this – often less than  R 1 000

    Bond Cancellation Attorney

    If you still have a bond on your property, you will need to pay the bond cancellation attorney as well. To my shock, I recently discovered that the bank appoints them and forces you to pay the fees – well they deduct it from the purchase price. The math works something like this: Purchase price – home loan amount left – fees = what you get back

    Bond cancellation fees:

    • Bank penalties – if you did not give 3 months’ notice, you require to pay 3 months of interest as a penalty. 
    • Bond cancellation attorney fees – this is normally a couple of thousand Rands – I paid 1% of my property value for this recently but could be higher depending on the attorney chosen for you

    Conclusion

    Don’t be deceived, there’s a serious amount of cash on hand that you need to buy a property. The main fees you need to consider are the bond costs, transfer costs and small odd fees that you need to pay, as outlined in the hidden fees.

    I have tried to break it down as much as I can, but I realise this is a complex thing – and it’s convenient for the people making money from it to be complicated.

    Happy investing!