There is a lack of education and information related to property investment in South Africa and it is essential to work towards unlocking this concept of wealth creation.
Rainmaker Marketing recently hosted their ‘How to make property investment more achievable’ in discussion with a panel of property industry leaders.
“In this session, some of our topics included the massive knowledge gap in this country which hinders the ability for more South Africans to unlock and to own property” says Stefan Botha, Director of Rainmaker Marketing and facilitator of the webinar.
Due to the overwhelming response, Rainmaker hosted a follow up webinar on the 28th of July 2020 to answer the flood of questions received.
“If these discussions can assimilate and result in enabling more South Africans the opportunity to invest, then we are achieving something” comments Stefan.
The first important step is to create awareness around property investment.
Vuyiswa Mutshekwane, CEO of the South African Institute of Black Property Practitioners (SAIBPP) believes that many African people are not familiar with the concept of property ownership which should start on a family level.
“It is an absolute priority to get these this going. The key thing is to start and to instigate these conversations. We have a responsibility to bring these conversations up and to teach everyone in our communities about property and how we can leverage it to our benefit”.
She says that many people who have inherited township homes may not recognize that they are in possession of a financial asset. “It is about drawing the connection between the roof over our heads and bridging the gap to the financial industry. This is a piece of education that I believe is certainly missing.”
Our current schooling system’s curriculum does not cater to the value and the importance of money nor the basic and fundamental education of what property is capable of says Tim Akinnusi, CEO, and co-founder of MortgageMarket.
“It should spark the idea that our homes hold high utilities and we need to position the youth so that they understand this” he says.
Embarking on your property investment journey
By acquiring non-value adding debt such as a car, you may miss out on the opportunity to start your property investment portfolio.
Rob Wesselo, Managing Director of International Housing Solutions (IHS) advises that you should rather leverage your debt towards property investment. With interest rates at 7%, you can bond an asset that should grow in value over time.
“It can be scary but the beauty about property is that you do not need to start big. We are not in the best market now, but property values are still growing. By starting small, you start to learn about the market and with this, you will gain knowledge”.
Property can be perceived as a risk but there has never been a better time to leverage your first investment to greater growth.
Your credit rating is the gateway
Rob says that it is often quite difficult to get through the door for the first time when applying for property finance. Banks and financial institutions require a credit track record and without this, the banks may be hesitant to lend you money.
Financial institutions use an objective instrument to judge the quality of what type of borrower you will be by reviewing your existing relationship with credit says Tim.
“Banks and financial institutions prefer if you have a credit track record with smaller items such as a cell phone contract. This will be the lead indicator for your credit behaviour. If you are not able to make consistent payments on the smaller contracts, how can they trust you with a much larger credit facility?”
The banks need to track your level of credit predictability too. If you default on multiple credit facilities, the banks will view you as being reliant on borrowed credit to fund your lifestyle. This will negatively impact your credit score.
“You need to protect yourself now by continuing to make consistent repayments on all of your debt. You do not want to find yourself in a position where you require a credit facility and your track records show that you are not worthy of this” says Tim.
Bongani Gumede, Managing Director of Tongaat Hulett Property says that most of the barriers we experience are self-imposed. You are building a brand in the investment space and your built credibility is what others will invest in.
“Do not look at financial investment before you have built your own self-discipline in investing in whatever you can. It is about building self-credibility and sustaining this with discipline. If you rush to levels that you cannot afford, the barriers will start to emerge. If you evaluate your level of affordability, you need to be able to sustain yourself with what you have before you borrow from someone else.”
The ins and outs of property finance
The role of a bank or financial institution is to provide liquidity and credit to speed up the rate of development and accessibility when it comes to bond finance says Tim.
“As much as the banks provide a mortgage over a twenty-year, twenty-five or thirty-year period, it is about helping property owners to make affordable repayments.”
If you take out a mortgage, you should know that there is an opportunity for you to pay the debt off easily and, what instruments are accessible to you to do so. Banks have a duty to show property owners how much interest is being charged during the lifespan of a mortgage and you have the choice to supress the interest charges by simply paying it off as soon as possible.
“Not everyone can pay more on their home loan” says Tim. “It is a give and take situation whereby the banks provide the accessibility and it is important to understand how to make this work for you” says Tim.
Kickstarting and balancing your first property investment
Rob recommends that you look to the affordable space for your first investment. There is a high demand in the current market, producing opportunities within the R400 000 to R800 000 region.
“You could rent in a market where you could ask between R4 000 to R8 000 per month. This is a defensive, popular market. I would recommend that you acquire finance from the bank and invest in two or three properties. Cross-collateralize these which will help you from a risk point of view with the bank.”
Not everyone is able to carry this cash flow and you could find yourself in a position where your bond repayments (combined with the associated rental costs) are slightly higher than the rental income. If you can carry a negative cash flow, you are able to claim back your interest costs in your year end tax return through SARS.
“The costs that make up this amount are not your capital repayments, these costs include your interest costs, rates and taxes, your levies and the rental commission” says Rob. “All of this forms part of a cost base.”
Seeking alternative financial assistance in the public sector
The FLISP subsidy (Finance Linked Individual Subsidy Programme) enables first-time home ownership to households in the ‘affordable’ or ‘gap’ market.
Pioneered by the National Housing Finance Corporation (NHFC), FLISP assists individuals who earn between R3 501 and R22 000 per month and who generally find it difficult to qualify for housing finance through a financial institution.
Simmi Naiker, Director of Subsidy Administration and FLISP for the Department of Human Settlements says that applicants require a bond approval in place before approaching the NHFC for finance.
“Once you have your bond approval, you can approach our team and will process your application within five days – subject to all of your documentation in place” she says.
Following your FLISP subsidy approval, the subsidy is paid into a suspense account. This usually happens before the bond has been registered. The funds sit in this dedicated account until the bond registration has gone through.
“FLISP is not something that takes long to process. Whichever province you are in, work with us, get your documents in order and it can by fully aligned with your bond registration process for you to use our subsidy as a deposit or the developer” she says.
In conclusion, Stefan says that property ownership is a key instrument in wealth creation.
“Once we can unlock this for more South Africans, it will have a ripple-effect across the entire property market and the economy as a whole”.