Real Estate Investor Magazine South Africa May/June 2019 | Page 36

PROPERTY EDUCATION
REI EXPERT
GUIDE TO
REAL ESTATE
INVESTMENT
Part 2: Get your
finances in
order and credit
ready to apply
for a bond
BY NEALE PETERSEN
I
n last month’s issue we covered the first step to investing
in real estate which is to invest in yourself and your educa-
tion. The second most important step is to ensure that you
prepare your finances properly.
Understand your financial statement
Your banker never asks to see your university degrees or school
report card. A banker wants to see your financial statements.
You must know how to read and understand the three parts
of your financial statement: Profit and loss statement, balance
sheet and your cash flow statement.
The difference between an asset and a
liability
One reason many people are in financial trouble is because
they confuse liabilities with assets. For instance, many people
think their house is an asset when it's really a liability. A
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MAY/JUNE 2019 SA Real Estate Investor Magazine
simple definition of an asset is anything that puts money in
your pocket. A simple definition of a liability is anything that
takes money out of your pocket.
The difference between capital gains and
cash flow
Many people invest for capital gains, meaning they're betting
on the price of something to go up. Unfortunately, today, many
people are taking it in the shorts. Investing for capital gains is
akin to gambling, only not as much fun. Instead of investing
for capital gains, the wealthy invest for cash flow and capital
gains are icing on the cake, if they do happen.
Your primary investment goal is to improve your personal
financial statement. Ask yourself these questions about a
potential property purchase:
•
How much cash do I need for a deposit for the
amount of cash flow I want?
•
If the tenant moves out and the property sits
vacant, how long can I afford it?
•
If there’s a costly maintenance problem, will I
be able to afford it? This is another reason to start small. If
my friends with the dilapidated house had started with an
industrial building, that driveway would have cost them much
more and would probably have caused them a much bigger
financial problem than the industrial property.
The purpose of real estate investing is to solve your financial
problems, not give yourself bigger ones.
Prepare your financial statement
Record all your current income. This could be income from
a job, income from assets, income you make working for
yourself. Record all expenses including taxes, rent, electricity,
school fees, car payments, credit cards, insurance, etc. Calculate
your surplus or shortfall to see if you have any funds left over
to invest.
Qualifying for a bond
The best is to apply for a mortgage bond through a bond
originator as they handle all your applications, paperwork,
pre-qualification and know which banks will grant you bonds.
When you apply for a bond, one of the first things your bond
originator or bank will do is check your credit score, that all-
important indicator of the level of risk you represent to the
lender.
‘A good score is the key to being able to access all forms
of credit including car loans and store accounts as well as
home loans - and is based on your history of payment on all
previous and current accounts, as well as the percentage of your
available credit already being used,’ says Rudi Botha, CEO of
BetterBond.
‘It is a quick way for lenders to gauge the probability of you
repaying your debts and managing your finances responsibly,
and it is so widely used that it is very surprising to us that
most South Africans have no idea what their score actually is,
or what factors could exert a positive or negative effect on it.’
The different credit bureaux in SA all have slightly different
ways of calculating your credit score, he says, but in general
scores range from around 350 to 999, and what you should be
aiming for is a score of 600 or more. At this level, you should
not have any problem getting a loan, provided it is within your
means to pay the monthly instalments.
The higher your score is above 650, the more likely you are
to be able to negotiate interest rate concessions, which in the
case of a home loan can save you hundreds of Rands a month