Property investor tips

Ways to increase your investment property returns.

For many people investing in property seems to be the most obvious, safest way to grow wealth. However, many fingers have been burnt by diving in headfirst without doing enough homework.

We would like to share with you a few tips from an article in Moneyweb by a Johannesburg based CA, Dean Gerber, about the financing of investment properties which may in the long run save you as the investor a lot of money.

1.    Appeal and negotiate your interest rate

It is very important to secure the best possible interest rate on your loan. This loan is potentially going to be in place for the next 20 years! Every part of a percent that you can cut out upfront will save you thousands going forward.

I’m always amazed at how many people will just accept the rate offered at face value. There is always room to negotiate with the bank. I have negotiated rates down by more than 3 percentage points in the past. If the bank is unwilling to budge, they will normally allow you to appeal your rate at some point in the near future if you have an improved financial situation.

By way of example, a 1 percentage point saving on the interest rate for a loan of R1 million, will save you around R150 000 in interest over the term of the loan (assuming a 20-year loan).

2.     Keep it Flexi

If you are thinking of using any excess cash you may have as a large upfront deposit, you may consider rather asking your bank to set up a Flexi Facility. This way you can deposit your cash into the bond post-registration of the property. You will have access to draw down on the cash at a really good interest rate should you want to buy a new property, renovate or even buy a new car. If you put down an upfront deposit, that cash will not be accessible again until you sell the property or apply for a further loan (which is costly).

Note: When it comes to negotiating your interest rate with the bank, there is a benefit to paying an upfront deposit. The lower the loan-to-value ratio (size of the bond over the purchase price of the property), the more favourable the interest rate.

I often ask the bank to quote me three different interest rates based on three deposit sizes.  I then get a feel for how to strike a good balance and achieve the best interest rate using the money I’m willing to commit upfront.

3.     The future-use-facility

If you cannot avoid putting down a deposit or your bank promises you a really good interest rate in exchange for a deposit, then make sure to register a Future-Use-Facility.

This is known by different names at different banks. Essentially, if you were to buy a house for R1m and put down a R200k deposit, the bank will normally only register an R800k loan against the property at the deeds office. However, you can ask them, prior to registration, to register a Future-Use-Facility for the R200k. This means that should you need access to your cash up to the full purchase price, you only need to undergo a simple bank credit assessment. Without a Future-Use-Facility, you will be required to register a further loan and pay the associated legal costs.

4.     Find a tenant on the seller’s time

It takes time to find a tenant for your investment property. But you can minimise the risk of having an empty apartment for the first month or two by doing the following:

·         Include a clause in the Offer to Purchase stating that the seller will allow you reasonable access to the unit for viewing purposes between the date of bond approval (i.e. when the offer becomes unconditional) and the date of transfer. This will give you anywhere between one and three months to find a tenant on the seller’s time.

·         Include another clause to allow yourself the option of taking early occupation should you find a tenant prior to the transfer date. This gives you options – should you find a suitable tenant prior to transfer, they can move in immediately (if the place is empty) and if you don’t find a tenant, you will have no obligations on the property until transfer.

5.     Section 13sex tax allowance

Yes, you read right: Section 13sex - the sexiest tax deduction around. This is for the slightly more sophisticated investor with more than five investment properties. It’s a great incentive for buying off-plan properties and not many investors take advantage of this allowance.

Very basically, if you own five or more residential properties you can claim, as a capital allowance, an effective 2.75% (55% x 5%) of the value of any units that were acquired directly from a developer. If, for example, you owned five apartments and one was purchased directly from a developer for R1 million, you could claim a tax deduction of R27 500 per year. If you are taxed, for instance, at the highest marginal tax rate of 40%, this could save you up to R11 000 per year. As with all capital allowances, it should be recouped on sale of the asset.

Source Moneyweb – Dean Gerber