Beginners Guide to Starting a Property Investment Portfolio
The idea of taking your first steps in building a property portfolio can seem unrealistic and a bit far-fetched, especially if you’re young, without extra financial support, and trying to establish your career.
For the majority of people, the key question is whether you can afford to buy your own property, and how to go about financing it.
The good news is that there are options open to first-time investors.
Step one: Find out what kind of finance you qualify for
It’s a misconception that you have to have stacks of capital in order to buy your first property.
Sure, having money in the bank definitely helps, but with a good credit record and some disposable income each month, the bank will more than likely grant you a loan.
Tip: Calculate how much finance you qualify for here.
Step Two: Maintain healthy credit
Pay off any existing (particularly high-interest, short-term) debt, and get your credit score as healthy as possible. If you don’t have a long credit history, save up a sizeable cash deposit before approaching a bank or bond originator for a loan. The usual deposit is about 10% of the total value of the bond.
Step Three: Do your research
Build confidence and master the fears that come with starting a new investment with thorough research and planning. Would-be property investors need to explore all of their options and educate themselves before taking action.
Some of the main points to considered are:
- How to structure the ownership investment (e.g. sole owner, partnership or trust)
- How to finance the investment and what assistance is available to you, if any (e.g. tax rebates, urban development zones, surety and investment partners)
- Which bank to use for the mortgage finance
- Where to buy
- What type of property to buy (sectional title, freehold, residential, commercial, etc.)
- And whether to renovate the property or not
Step four: Invest with partners
If you don’t have the means to invest on your own, approaching somebody who is willing and able to to help such as a parent, family member, partner or friend who can assist.
There are two routes here:
1. Ask somebody to stand surety for your bond
This would mean that your guarantor would stand surety for your bond repayments if you fail to do so on your own.
With rental properties this is often an attractive option as the guarantor would only have to pay the shortfall not covered by rental income, and in some cases rental income alone can cover monthly bond repayments.
2. Invest as a group
Another means of assistance in getting your investment started is by going into the venture with additional investors.
This can be quite risky because if one person defaults on their portion of the payments, the responsibility will fall on the others, so it’s essential to invest with people you know, trust and that you are certain are in a position to always come through, i.e. close friends and family.
Be sure to have a thorough Partnership Agreement drafted by an attorney so that there is a mechanism to deal with any transgressions or situations that may arise.
The banks are likely to approve a bond that is held jointly by two or more people because it spreads their risk, and the combined salaries of the investors will likely be more than adequate for their loan criteria.
Tip: Calculate the costs of a join bond repayments here.
Step five: Start small
An important factor to consider is what type of property to buy and where and when to buy it.
In general, a low priced residential unit, in an area where year-on-year house prices are increasing faster than inflation and perhaps where future renovations can take place is a safe bet.
A R500 000 property at 10,00% interest will cost around R4,825 per month before levies and tax are included. If you are able to lease the property for around R4, 000 per month, the bulk of the bond and property cost is paid for through rental income, meaning that you are spending less of your own money out of pocket.
Step six: Add value
Value is added to your property indirectly through market growth, or directly through improvements to the property itself.
Another option is to add additional money to your bond, which will shorten your repayment period and save you considerable money in the long run.
When a property increases in value, this opens options for investors to secure a second bond, and increase their portfolio.
Step seven: Secure additional finance
As the value of your property increases, options become available (at the discretion of your bank) for you to secure a second bond.
For example, if you bought your property for R1 million five years ago, and the value has increased to R 1,5 million, it is possible for you to borrow the difference (R500 000) between your initial purchase price and the current property value.
This method is frequently used by property investors to expand their portfolios, but it demands thought and a good deal of research to grow your investments well.
