INVESTING
example , when your monthly rental income is less than the mortgage payment , levies , rates and taxes , rental commission , etc , you could be in trouble . This is where a lowrisk investment can very quickly become a high-risk endeavour .
So , how do you hedge yourself against such risk ? You do it by building your property portfolio in such a way that there are no shortfalls on your property . Or if there are shortfalls on your property , you must have a strong reserve fund to subsidise your monthly shortfalls . Ideally , you want your reserve fund to cover at least five years of shortfalls .
The best way to prepare a reserve fund is to refinance your properties to market value . Then , park the funds made available in the access bonds of the properties so you don ’ t pay interest on the money while you are not using the funds . These funds can then be used to subsidise your monthly shortfall , providing a safety net in case of unexpected circumstances .
A reserve fund is so important as subsidising shortfalls out of your pocket can become very dangerous . What if interest rates go up ? What if you lose your job ? Suddenly , you won ’ t have a monthly income to subsidise the shortfalls anymore !
Even though property is a lowrisk investment , your reserve fund is critical , especially when you finance and refinance your properties . You need to have a certain percentage of the property value in cash in case something goes wrong .
For example , you can start with a reserve fund containing 10 % of the property value and then increase it to 15 % eventually . In other words , if you have a R1 million property , you want R100k in your access bond and move towards having R150k . But you do not have to save up for this . You can refinance your property and keep this amount separate in your bond ( access / flexi ) after you ’ ve had the property for a year .
Read our article on how to Maximise your Property Investment with Access Bonds .
Balancing the risks and rewards of property investment Property investment offers a compelling avenue for building
41 DEC 2023 / JAN 2024 Real Estate Investor Magazine