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Finance as Investment
Financing Property
Financing a property as an investment can offer several benefits:
- Leverage: By financing a property, you can use other people's money (such as a mortgage loan from a bank) to acquire the property, which allows you to control a more valuable asset than you could with your own funds alone. This leverage magnifies the potential returns on your investment.
- Diversification: Investing in real estate through financing allows you to diversify your investment portfolio. Instead of tying up all your available capital in a single property, you can spread your investments across multiple properties, potentially reducing risk.
- Cash Flow: If you purchase an investment property using financing, the rental income from the property can help cover the mortgage payments and other expenses. This cash flow can provide you with a regular stream of income and potentially increase your overall return on investment.
- Appreciation: Real estate historically tends to appreciate over time, meaning the value of the property may increase. By financing the property, you can benefit from the potential appreciation while only investing a portion of the property's total value.
- Tax Advantages: Financing a property as an investment can offer tax benefits. Mortgage interest, property taxes, and certain expenses related to managing the property may be tax-deductible, reducing your overall tax liability.
- Inflation Hedge: Real estate is often considered a good hedge against inflation. As inflation rises, property values and rental income tend to increase, potentially protecting the value of your investment.
- Potential for Forced Appreciation: By using financing to improve a property, such as through renovations or upgrades, you can potentially increase its value. This strategy, known as forced appreciation, allows you to generate a higher return on investment than the initial purchase price.
It's important to note that investing in real estate carries risks, and financing properties also comes with potential downsides such as interest payments, the need to meet debt obligations, and market fluctuations. Careful consideration, analysis, and a thorough understanding of the local market conditions are essential before making any investment decisions. Consult with us can provide valuable guidance for you to ensure you make an informed decision.
Example
Physical property vs Unit Trust investment
| Description | Property Purchase | Unit Trust |
|---|---|---|
| Initial Investment | R200 000 | R200 000 |
| Invested Capital Value | R1 000 000 | R200 000 |
| Capital growth @ 8% | R80 000 | R16 000 |
| Finance | R800 000 | - |
| Repayment 20 Years @ 11% | R8 258 | - |
| Levies etc | R1 500 | - |
| Total Cost | R9 758 | - |
| Rental Income | R8 000 | - |
| Shortfall | R1 758 | - |
| Real Net Annual Growth | R58 904 | R16 000 |
| Annual Growth on Initial investment | 29.45% | 8% |
The above summary is only for illustration purposes.
There are two growth avenues with property as investment. Income which refer to the rental income received and Capital growth based on the total property value. In simple terms you invest R200 000 and receive growth on the R1m property value. Investing R200 000 in a unit trust means you can only earn your growth on the R200 000. There will be a shortfall you will pay with property financing. The Net Growth (Interest on property value minus Shortfall) will still be a lot more compared to investing in a unit trust. You need to have additional cash flow to cover the shortfall and cash flow in the event of rental income not received. The shortfall is an investment.
Contact us today for a free Home loan certificate application. This will provide you with a certificate to see for what you qualify for and is valid for 90-days. Our professionals will guide you how to position your finances.
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