Property offers the power of gearing

One of the biggest reasons for property’s gain in popularity as an investment over the past few years has been the ability to leverage the purchase by accessing mortgage finance.

“This has of course been much more difficult to do over the past two years because of the economic downturn and ensuing consumer credit crunch,” says Martin Shultheiss, CEO of Harcourts Africa, “but the power of gearing has remained attractive and is currently even more so because interest rates are at such a low level.

“The fact is that a mortgage remains one of the best wealth creation tools available to the general public, because it enables you to buy a property worth far more than most people could afford using just their own money – and to keep the profits on both the bank’s money and your own when you resell.”

This is certainly not the case, he points out, when consumers invest in shares, for example, “or even if you keep your money in a savings account. The only profit you make then is the dividend or interest on the money you put in yourself.”

Gearing goes to work, Schultheiss explains, when you buy a property using your own funds for the deposit and a home loan to cover the rest of the purchase price. “Say you pay a 10% deposit for a house costing R500 000 – or R50 000 - and borrow the other R450 000.

“When property prices rise by 10% and you decide to sell the house for R550 000, you will be left with a R50 000 profit on the sale after you’ve repaid your home loan. And you will not owe any of that profit to the bank, which means that you will have doubled your own initial investment of R50 000.

“There are not many other ways for ordinary investors to do that within a relatively short period.”

Alternatively, he says, it is often possible for homeowners to leverage the increase in their property’s value to finance other things, such as education or the purchase of a second property to create even more wealth. “And once again, you will be benefiting from the increase on the total value of the property, not just the deposit you paid.”

Article by: www.harcourts.co.za