Isaac shows how with discipline and a goal it is possible to build up a portfolio of properties on a limited salary that will one day pay you an income. It is important however to make sure that you do not over extend yourself and risk losing your entire investment. You also need to keep accurate books and manage your properties as a business.

Isaac is 28 years old and on his way to building a property portfolio. “Although I have never earned a big salary, I have always believed in saving money,” says Isaac who currently owns two flats and is looking to expand his property ownership.

A year ago Isaac bought a three-bedroomed flat for R400 000. He had built up his savings in a unit trust fund over the last seven years and was able to use this to put down a 10% deposit and pay for the registration and transfers which came to a total of R80 000. He rented out two of the rooms to help him pay R3000 per month bond.

A few months later he bought another two-bedroomed flat for R350 000. This time the deposit and registration costs set him back R70 000 of which he had to borrow R30 000.

“It was difficult, I had to make sacrifices. I do not spend my money on drinking and funny things like that – I just use it for food and accommodation and save the rest,” says Isaac who adds that he regularly reads the newspapers for advice on how to save and invest his money.

Isaac is paying an extra R500 a month into the bond repayments as well as paying off the R30 000 he borrowed and currently has only R15 000 left to pay on the shorter term debt.

He receives R3000 rental from the two rooms he rents out in the three-bedroomed flat where he lives and a further R3700 from the two-bedroomed flats. “Basically all these properties are paying themselves every month, including levies and rates and taxes,” says Isaac.

Isaac is now in a position where he wants to expand and purchase another property with the aim of one day having several properties which pay him an income. He is concerned that he now needs to view his properties as an actual business. “One thing I know I must do is to register the property as a business, and pay income tax on from the rental I am getting, but I haven’t yet done this yet,” says Isaac who also wants to know if the banks would finance a further property.

The solution:

“Based on the background you sketched, it is evident that you have made a conscious decision to be in the business of property investing. This is an active role you have taken in being exposed to the benefits of property investment,” says Ricardo Teixeira, strategy consultant at acsis who adds that Isaacs discipline in saving, budgeting and paying off debt has been, and will continue to be, rewarded as he gets older.

Keep records: Teixeria recommends that Isaac start to keep proper records. “In order to be correctly understood and appreciated by your bankers as being in the business of property investing, you will need to keep and create records of your business income and expenses from the properties. This will greatly assist the bank in making an informed credit lending decision against your application for additional debt finance to buy your future properties”.

Teixeria says many investors don’t realise that a property portfolio is essentially a business that needs to be run effectively in order to generate capital return. Although the management of a property can be outsourced to an agent it is important to consider who you partner with to manage your property as those decisions will materially impact the future value of your property as well as your tenant’s experience of renting your property. “Acquisition and operating expenses such as transfer duties, legal costs, levies and taxes are important to consider when evaluating the viability of a property-related investment.”

Keep it simple: However Teixeria says one does not have to ‘register’ as a business to be seen as a business. Marius Marias, head of FNB Housing Finance agrees and advises against registering the property under a formal entity such as a company. “Running a business requires a lot of money to administer and audit. Therefore, registering the house could further cause unnecessary financial constraints. Keeping the house under your name has a lot of benefits than those of a company. Amongst others these include: less interest on bond and operational expenses, tax benefits as well as capital gains benefits – these could then result in more money in your pocket to supplement your wealth map,” says Marias. Isaac will need to declare the rental income to the Receiver of Revenue however he can deduct expenses such as interest on the bond, levies and maintenance costs.

Funding: Marais says although FNB’s current credit policy does not restrict anyone from purchasing more than one house, the crucial aspect in approving the loan will be Isaac’s ability to pay the loan from his primary source of income, in other words his salary.

Isaac will not be able to borrow money based on the assumption that he will be able to rent out the property to pay the finance. If he is unable to find a tenant the bank wants to know that he can afford to repay the loan himself.

Marais says the bank will look at Isaacs’s prior and current repayment behavior as well as their level of affordability from their main earnings. “Repayment and affordability patterns can be determined through you providing us with your detailed income and expenditure analysis as well as your bank statement where your monthly earnings are deposited”.

Patience: Isaac has made two major property purchases in a short period of time and has depleted his savings base. It is important remember that Rome was not built in a day and now would be a good time to consolidate and focus on paying additional income into the bonds on the property and clearing the R15 000 short term debt. Once he has halved the bonds on both properties and is receiving income over and above the bond and running costs of the property, then he could consider a third property. It would be a mistake to over-commit at this stage and possibly risk losing what he has already built up.

Passive property investing

If you want to have exposure to property but you do not want the hassle of managing tenants, you could opt for investing in listed properties. You can do this by investing into JSE listed property unit trust shares or real estate property unit trusts through an asset manager. This will also give you exposure to property without having to actively manage the property.

It is advisable to consult with a stock broker or financial planner if you want to make a passive investment in property because of the wide range of choices.

Do your sums

If you are considering buying a property as an investment make sure you do your calculations first as there are many additional costs that need to be covered:

• Transfer and registration costs need to be built into the total cost of buying the property
• You will have to insure the property and also consider taking out rental insurance to protect against non-payment by tenants
• You will have levies and property taxes every month
• You need to set aside money each month for maintenance especially if you are renting out the property as tenants do not always treat the house as their own

This article first appeared in City Press