Buying your first property (or any property for that matter) can be daunting and stressful. It is also very expensive and a substantial financial undertaking.
Here are a few practical and hopefully, useful tips to consider:
- PREPARE PREPARE PREPARE
- CHECK YOUR CREDIT REPORT
- AFFORDABILITY ASSESSMENT
Preparation is the key to success, so they say. Purchasing you first property or any additional property for that matter, should not be a spur of the moment decision. So much can go wrong: location, price, build quality.
It is therefore imperative to take your time before making a purchase, at least 6 months to give yourself enough time to prepare. You want this process to be as predictable as possible. You can never be ‘over prepared’.
Your preparation starts with searching for the right property, understanding your affordability and what level of financing you will require, amongst other things. Have a look at what I call the ‘Property Investment Principles’ (see link: https://propertylink.africa/the-property-investment-principles/).
If you will require financing, it is important to know and understand your credit report. Your credit report provides a history of your financial behavior and banks will look at it to formulate an understanding of your spending patterns, debt repayment and overall affordability. Check your credit report, make sure you score is high enough to be considered for financing and that the report is clear of any impediments (no adverse findings or late payments) as this will inform whether you are a risk lend and the rate you will receive. Time to prepare will give you an opportunity to remedy any impediments on your record if you have had a few wobbly moments. Banks will certainly check this to form a view on your historical relationship with credit. Most credit record companies have a free registration system that allows to view your credit information – a good place to start: (https://www.clearscore.com/za/ / https://www.experian.co.za/)
As a rule of thumb, banks will fund loan repayments not exceeding 30% of your gross monthly income for a primary residence.
Depending on your income and expenses, you do not want to be at the high end of that number. 20% or less is a good place to start, it will also give you a bit of breathing room if there is a change in your financial circumstances, unexpected cost that may arise or even substantial increases in interest rates. Not only is this more affordable, it will also allow you to build ‘equity’ in the property quicker – by having a bit of extra money you can make extra payments into your bond as and when you can. Also generally, spending to your maximum affordability on an investment property is not a good idea – many unexpected costs can creep up and your budget needs to be flexible enough to absorb these and even create a maintenance fund over time.
In performing your affordability assessment, the best thing you can do, is to be brutally honest with yourself and not be overly optimistic in respect of what you can afford, the related expenses (electricity, rates, levies, security etc.) and in the context of an investment property, what you can expect as rental income.
In order to help simply things and to keep a good handle on costs, create a monthly income and expenses spreadsheet detailing all your income and expenses (be honest). Include a simulation of all cost associated with the property (electricity, rates, levies, security etc.) and not just the loan repayments and for an investment property, the rent to be received (be conservative). Keep in mind that the banks will usually discount the amount to be received as rent by up to 30%, meaning if you expect rent of R5000 p/m the bank will include R3500 in your affordability calculation as a start. This does not mean you must overstate the rent to counter the discount. This will only get you into trouble further down the line and banks are likely to know where amounts have been inflated for a particular area in any event.
An income and expenses spreadsheet will also help you understand your finances better and see where you can cut out ‘unnecessary’ expenditure.
Note: Banks like predictability – KEEP your spending consistent. No erratic clubbing nights with mates or expenditure that cannot be explained.
Purchasing and owning property is costly. There is no magic or secret to this purchasing or investing in property, it is sadly capital intensive. Use the preparation time to save for all the associated purchase costs including the deposit (banks generally require 10% of the purchase price), bond registration costs, transfer duty (applicable to properties over R1million), renovations (if required), moving costs and even the cost of furniture (not all developers or sellers will give you expensive kettles and appliances etc).
Note: Speak to your bank and get them on board as you go along. Nothing should come as a surprise to your bank when you make an offer. The online pre-approval process provided by many banks is a good start but is not guaranteed.
A short version of this article was featured on BankerX: https://bankerx.co.za/2020/07/11/practical-tips-for-buying-your-first-property/
*Disclaimer: The contents of this article should not be considered as legal, professional, financial or any other form of advice. These are merely views based on the writer’s personal experience. Readers should obtain independent advice on any matter prior to making any decision.