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By Neil Vorster 

Wealth Management  and Wealth Transfer

wealth managementWhile we often refer to residential property “investment”, I believe that since we are aiming at wealth management, the term we use should be wealth transfer” not “investment”.

The key players in this process of wealth transfer are Banks,Tenants and Inflation .

Mention these three words in casual conversation and the negative comments abound, when in reality the words Bank,Tenant and Inflation are actually the best kept secrets in the world of property investment–forgive me I meant, property wealth transfer!

I will walk you through the process of property wealth transfer and you will see for yourself.

Step 1 Use other people’s money to pay for the property  

When one acquires a buy to let townhouse, the astute investor obtains maximum bond finance. HE DOES NOT PAY FOR THE PROPERTY HIMSELF! The bank pays for it for him. He probably only pays a small deposit and the transfer fees. This is a vital thing to remember when one works out your return on investment. Don’t get caught out by using normal accounting methods which assume that you invested the full purchase price in cold hard cash.

Step 2 Use other people’s money to pay the bank back

A carefully selected buy to let investment will ensure that the market related rental you achieve covers the bond repayment and levies. This is fairly hard to do in 2017, and you may be required to subsidise your costs for a year a two. Any money that you do put in to subsidise monthly holding costs will come back to you as the rentals escalate. When all is said and done, after about 10 to 15 years, your tenant will have paid off your bond for you.

Step 3 Let inflation help your tenants to reduce your bond

Inflation, like death and taxes is here to stay. In developing countries like South Africa, inflation is the primary concern when trying to figure out how much money you need to retire on. With residential property the formula is fairly simple and residential rentals are excellent hedges against inflation. The average person in any given Johannesburg Northern suburb pays about 25% of his household income on rental. This helps you   retire early   and it is independent of inflation.

My point is best illustrated by an example I used in My tenants paid for my children’s education . In 2001 I purchased a small Morningside townhouse for R 130 000 which is worth about R750 000 in 2013.  (That sounds like a ridiculous price, doesn’t it?)

My initial bond was R 130 000.That meant in 2001 my loan to value ratio was  1:1 or 100% . Sixteen years later, if I paid my minimum monthly bond repayments each month and did not access some of the equity though a second bond, I would owe about R50 000 on a property now worth R900 000.

That would leave me with a loan to value of 5%. In 2017 ie: I only would only owe 5% of the value!

Given that Morningside has provided average capital growth of 10- 15% per annum over the last 16 years while the average inflation rate has been around 6-8 % for the same period, a good deal of the “value growth” is purely due to inflation.

Inflation has conspired with great capital growth to reduce my loan value percentage dramatically.

One can only imagine how quickly your outstanding bond would become insignificant in a hyper inflationary environment. In hyper inflationary environments, only property will keep you afloat.

Inflation, tenants and banks are a residential investor’s best friend, they are the essential elements in wealth transfer and effective wealth management.

Happy “investing”

Have you seen inflation paying your bond off?

Please leave your comments and questions below.



About the Author Neil Vorster

Neil Vorster is a property investment coach, investment author and co-founder of Organic Growth. Aerobatics pilot and cycling nut.

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Please leave your comments and questions below
  • Hi Neil,

    Thanks for the good article.

    You say “the astute investor obtains maximum bond finance.”. My question is: How much of your purchase price will banks finance? I know you can get 100% finance if you are a first time buyer.

    But what if you already own a property and want to register a trust and buy a new property in that trust? Will you only be able to get 90% financing?

    Thanks again

    • Hi Pieter
      The banks in South Africa are currently quite comfortable with 90% financing on secondary bonds for subsequent investment properties (personally and in trusts and companies) as long as you meet their affordability criteria.
      I wish I could give you an easy answer as to how they reach their affordability decision. They are all unique and have their own methods of assessing income, especially rental income from other properties in your portfolio.
      A call to an experienced and active bond originator will be invaluable as they are in constant negotiations with the various banks.

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