STRATEGIES
Do not overgear, repeat, do not overgear
Gearing represents the percentage borrowing to the
price of a property, thus a bond of R300 000 on a
R1 million property produces a gearing of 30%.
A buy to let investor will typically maximise
his gearing as in most cases losses on rental can
be offset against other income (subject of certain
conditions). This serves to substantially increase the
yield on the investment.
Take good care of your investment
For the owner/occupier it has been said that being
responsible for a house means you have to take care of
it, and taking care of a property is like taking care of
a person: it binds you to it. Thus the owner takes great
pleasure in maintaining and upgrading his property,
knowing that apart from personal satisfaction the
expenditure will ensure growth in the capital value
of the investment.
“Fortunately bank repossessions
are on the wane but they are to be
avoided at all cost as auction sales
seldom achieve the true worth of
the property”
However, it is
impor tant to ensure
that there is a safet y
margin in your
gearing, When doing
the calculation around
your bond repayments,
allow some scope for
a 2% or more increase
in interest rates for safety especially in times of
a rising interest rate curve, as we have now. Of
course in time rental escalation should more than
make up for higher interest rates but it is in the
early stages of a property investment when the
numbers are most vulnerable.
For many first time buyers, banks will lend 90% or
even 100%, subject to affordability on properties up
to R1 million. Whilst this may sound attractive it is
important to factor into your budget a higher interest
rate for conservatism.
Fortunately bank repossessions are on the wane,
but they are to be avoided at all costs as auction sales
of distressed properties seldom achieve the true
worth of the property and often the bondholder
is left with a residual debt to the bank after the
property has been sold. Thus an overgeared ‘dream
home’ can turn into a nightmare. Careful calculation
and a conservative approach to gearing is paramount,
at least until you have built up sufficient capital.
12
Residential Handbook 2014
Likewise the buy to
let investor should have
a carefully co-ordinated
maintenance plan, and
a budget a l lowa nce
for it to avoid nast B