How to Purchase Investment Property

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					                     How to Purchase Investment Property

Ever wonder whether it's possible to 'purchase' investment property without paying a
cent, using the traditional banking route?

It is!

The reason why 'purchase' is in inverted commas is because you have to go through the
normal buying process to transfer a property onto your name or the name of your
company. But that doesn't mean you have to pay to get the job done.

Nowadays, it's very difficult to find a bank that will grant a 110% loan to value mortgage.
Banks are reluctant to finance the full property price and pay additional fees such as
transfer and registrations costs. If they do, they take on more risk.

Prior to 2008, most banks were more than willing to take on the risk. Today, things are
different. Banks insist that mortgage applicants up their invested interest in the property.
They do this by having you pay at least a 10% deposit. You also get to cover all the
added legal fees.

Can one still find financial service providers post-2008 that grant 110% loan to value

Yes, but it's more difficult. There are also certain things that you have to do or factors
that need to play in your favour:

        For one, you must have a clean credit history. A poor record can squash your
         chances of receiving a loan.
        It also depends on the bank and their policies. Some of them are keen on taking
         more risk in certain areas. It depends where their business focus is and where the
         investment property is located.
        How good is your relationship with the bank? Do you currently own any products
         with them? This will put you in good standing with the bank. Trust plays an
         important role.
        Overall market conditions also determine whether you'll obtain a mortgage and at
         what loan to value ratio.
        How serious are you about purchasing the investment property? Try not to follow
         normal banking channels when applying for finance. Make an appointment to see
         the credit manager. Approach him or her with a business plan and show them that
         you are a serious entrepreneur. First impressions always last.
        Don't use mortgage originators. Banks have to pay them for referrals. Deal
         directly with the bank and get on their good side.
      Affordability plays a big role. A bank will check your financial statements to see
       whether you can afford the mortgage repayments. Don't expect to get a loan if you
       are already under stress from a cash flow point of view.

Here are some of the details around how I purchased my second investment property
without using a cent of my own:

   1. The property is a 120 square meter apartment situated in a popular area in
      Johannesburg Berea. Purchase price/market value: R120000 ($15000 @ $1:R8).
   2. At the time of purchase in late 2008, the bank granted me a 110% loan (R132000
      or $16500 @ $1:R8). That gave me an additional R12000 ($1500 @ $1:R8) to
      pay the transfer costs and apply a fresh coat of paint.
   3. Rental income after costs from day one of taking ownership was R2400 ($300 @
      $1:R8). Bond repayments were R1362 ($170 @ $1:R8), leaving a net profit of
      R1038 ($130 @ $1:R8).
   4. In the world of investing the unit is referred to as a cash flow positive property.
      Profit is generated from month one. And because I used only the banks money to
      purchase the property, my return on investment was infinite! The return is so high
      you can't even measure it. It's as if someone pays you a salary without having to
      give anything in return (nothing for something).
   5. "Yeah but the banks will insist on a deposit and I don't have enough money to pay
      everything". The environment was different back then and yes, it's difficult to find
      a bank that will finance the full cost. But you have options. Here are two:

              Find an equity partner, someone who will pay the deposit and legal fees. It
               could be a friend, family member or business partner. In return, they share
               in the profits.
              Ask the seller to pay the deposit and costs. In return, you pay the seller
               back with interest over a period of time.

There are no hard or fast rules when it comes to organising finance to purchase
investment property. Banks represent only one option. There are many others available.

At the end of the day, the main objective of a wealth creator is to close business deals at
an acceptable level of risk. When it comes to investment return, the sky is the limit.