Before buying your first house, do this first…

by Francois Joubert, Editor of Red Hot Penny Shares, 28 November 2018

If you're in your mid-twenties or early thirties, chances are you're getting ready to buy your first house.

If you're a parent - you might be advising your kids on how to do this.

But this might just be a bad idea right now.

Don't get me wrong… I am an avid property investor.

And that's why I want to share with you this bit of advice…

Special Announcement: A R10,000 yearly investment using this secret would be worth R737,363 today

Why buying that first house could be a horrible idea

Houses are notoriously bad investments.

Let’s take a typical R1.5 million 3-bedroom house on an 800sqm stand.

Firstly – a house built on a large stand typically needs lots of attention to the garden and lawns. If you get a gardener in once a week, that’s R250 a week or R1,000 a month for labour alone.

Add in a lawnmower, fertilisers, cost of watering the gardens and lawns and perhaps a couple of new plants every now and then…

That could easily rack up a further R300 a month.

Then comes upkeep to your house. This would typically be a fresh coat of paint every three years – at R40,000 to do this (and that’s cheap) you’re looking at a monthly cost of around R1,111.

Add in insurance of R500 on a typical R1.5 million home, property tax of R800 and you’re looking at around R3,711 monthly expenses (at a minimum) to live in this home. A typical loan repayment on this property would be R14,000 per month.

That means it will cost you R17,711 a month to live in this house.

If it is in an estate – you can add levies of another R1,500 a month – bringing your cost to R19,211 per month.

Renting this property won’t make you money

A quick internet search of rentals of properties in this class finds that you’d be lucky to get R12,000 – R15,000 in rental for such a property per month.

That means – in a good scenario, you’d be better off renting it yourself.

If you bought it and later wanted to let it, and upgrade to a better place yourself you’d easily lose R4,000 a month. Or more…

This is what young people today should rather consider

Instead of purchasing your first home, rather buy an investment property.

A one or two bedroom apartment costing less than R900,000.

Take a recent one bedroom I purchased for instance:

Purchase price: R463,000
Monthly levies: R680 per month
Property taxes: R280 per month
Maintenance provision: R300 per month
Rental: R5,150 per month
Total Income: R3,890 per month, which equals R46,680 per year.

For a 10% yield on the purchase price.

In addition, the body corporate does all the outside maintenance, security and insurance payments from my monthly levy.

I only need to cover maintenance such as repainting the inside and small items like that.

That means, with a R50,000 deposit your monthly loan repayment is R3,849.70 per month.

So, the property generates a positive income from day one.

Then, as an alternative to purchasing the home you want to stay in, rather rent a similar home as it costs you less.

If you like, you can save the difference each month towards a deposit.

Then, when you eventually purchase a home to live in, you can put down a larger deposit – and the income from your investment property would likely already cover a portion of your house’s loan repayment!

Three more benefits to following this investment strategy

You’re young – enjoy it Being young and independent can be amazing. You can make your own rules, live where you want, buy what you want and travel whenever you want. Once you purchase a house, it’s no longer the same as simply living in a lock up and go property. A large mortgage repayment will tie you down. You will be worried about the security of the place while you’re away and it is much tougher to sell a large property than a small apartment.
You’ll have another source of income When you own an investment property, the rental income you receive will form part of your income when you apply for a new loan. So after a couple of years, all the profits you make will help you to get a larger loan or better interest rate. You can also write off any expenses on this property’s maintenance against your income tax. With a personal property, you can’t.
Changing demographics make houses less attractive More and more people do not want to live in large houses with all the maintenance requirements. That firstly means higher demand for smaller apartments, especially in the rental segment. Secondly, it means that on selling a large house is difficult and likely not profitable…

With interest rates having just increased – there’s all the more reason to take a smaller risk and buy a cheaper property first before tying yourself down and barely scraping through on your budget each month…

Here’s to unleashing real value,

Francois Joubert,
Author, How to become a master property investor in 90 days.

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Tags: buying a house, property investing, investing in property.

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