Thanks for dropping by Safe Investing South Africa. I am on a journey to build wealth my way. For any questions or comments, feel free to contact me.

22 Sep 2015

BUYING PROPERTY FROM A SHERIFF'S AUCTION

The reader's email below is about buying property from a sheriff's auction to create wealth. All the best to you Mr S.
Student accommodation closet
Hi Mbini,
I'd like to start by thanking you for your informative blog. I have learnt so much from it.

The reason I am writing is that I would like to start investing in property and I'd appreciate getting your advice.

I have a house that I purchased 3 years ago and I am halfway through paying off the bond. I use this as my home and I would like to purchase a second house to rent out. What I would like to know is should I wait until I pay off my house (which can take up to 3 years from now) or should I borrow the money I have paid so far for my house and buy a very cheap property.

Because I don't have much money, I have been considering buying from the sheriff's auction but I have the following concerns:
1. Would I be likely to get a good property at a cheaper price
2. Do I need to purchase cash or will the sheriff's office wait for the bond approval to be processed by the bank
3. What would be the cons of buying from an auction?

Thank you for taking the time to even read this and please can I ask that you keep me anonymous should you put this on your blog.

Regards,
S
Thanks S for your email. Well done on planning to pay your homeloan so quick. I have responded to similar questions on raising funds for the investment property in my previous three posts. If you haven't already, do check those posts at:
Starting in property investing...
Paying cash for a house...
Raising capital for a property investment...
Early retirement and property investing...

If you still have specific questions on raising funds for your investment property, feel free to leave a comment below this post. Now on the sheriff's auction questions you asked:

1. Would I be likely to get a good property at a cheaper price?
Your first question is on whether you will be likely to get the good property at a cheaper price when buying property from a sheriff's auction. The short answer is that, you can get a good property at below market rate prices anywhere. Buying a bargain property is possible but because of where we are in the economic cycle, those deals are not easy to spot. Searching for bargains is not easy, especially at this time of the economic cycle. Recession is the time where opportunities to get bargains are unlimited. There is also existing players in the sheriff's auction property space. You have to go there and compete with guys who are experienced and even determined to intimidate and scare you off. Everything worth fighting for is usually a bit scary. In all, you may get the good property at a cheaper price in and outside the auction.

You will need a bit of preparation for the auction. Your local sheriff should be able to provide you with the list of what they have available. The trick with the auctions is to determine the amount of money you are willing to part with and not be easily swayed from your target. Critical decisions are not taken at the auction, but before it. You have to know how much returns on investment (ROI) you are willing to settle for. You then do the maths and know what you can offer to get those returns. Going to the auction is only to get your predetermined ROI. You may start by doing a trial exercise by going through the sheriff list, picking a property, doing the maths, attending the auction and asking the questions to have an understanding of the whole process.

A number of variables will determine your bottom line. The property you are eyeing may be having debt for water and electricity, rates and taxes, home owners association fees, and other fees you need to pay. The property may also be home to a tenant who refuses to vacate it. And getting rid of the tenant may be a costly legal battle. That is more reduction to your ROI. If the property is vacant, it may be in a bad shape or even vandalised and in need of costly repairs. Naturally, any distressed property is likely to need repairs, and that should be catered for. Renovations can be quite expensive.

2. Do I need to purchase cash or will the sheriff's office wait for the bond approval to be processed by the bank?
You need to have a deposit. But be sure you can get it back if you are unable to secure a homeloan. It is more difficult to secure a loan for a repossessed property than properties in the open market. If the property has been vacant, it is usually in a state of neglect. It may actually be in a similar state even when occupied. You stand better chances of getting the financing from the bank that repossessed that particular property if it is already in the hands of the bank. If you can, arrange for financing before hand.

3. What would be the cons of buying from an auction?
Please refer to number 1 above. Other disadvantages are related to how the property looks. You are buying it "voetstoots", meaning that you get it as is. Some of the problem areas are not easy to spot. You have no grounds to put a conditional offer. As mentioned above, you will have to pay for outstanding levies, rates and taxes and other related costs before your property is transferred to your name. I also secure the place by changing all locks before letting it to new tenants. So the security measures are not unique to distressed properties. However, it becomes even more important for properties that have been vacant for a while. Apart from those costs you have to also pay the auctioneer and sheriff's commission when buying property from a sheriff's auction. The Sheriff’s commission is about 6% on the first R30 000 of the proceeds of the sale, and 3.5% on the balance thereof. The maximum commission payable is R 10,777 plus VAT with the minimum being R542 plus VAT. The electrical compliance certificate may attract an extra cost especially if the wiring is faulty. The seller of my latest acquisition just parted with about R50,000 to fix the old wiring.

Buying property from a sheriff's auction is becoming a broad topic. I will have to follow it with a summarised version post of the sheriff's auction conditions. The bottom line is that, you may not be getting a bargain if you have not done a thorough job of investigations and calculations. The area where the property is located remains an important factor.

Note:
It is so important to never let your dream die. This evening I have been thinking about a number of doors that closed shut in my face "BANG!!!". Just as I thought, "if only I can get 1, 2, 3 opportunity, I'd be OK". Somethings blocks it. But each time I miss out on an opportunity, I somehow get amazing energy to create another one for myself. Even this blog is the direct result of writing opportunities I missed on. I always wanted to interview the South African middle class to stir a debate on how we can better our lives. I sent proposals to publications on this in vain. Until one day I decided, "Flip, I'll do it by myself". Then this blog was born. I love what I am doing here. Thanks for reading, sharing and continuing to send me emails. There are plans to grow this platform to something really big. Keep watching the space. Thanks again for being part of my happy space.

Thanks for the amazing emails. I respond to each and every email I receive. I keep all emails anonymous when I  respond to them through this platform. Feel free to make a follow up question or comment using the "Contact Us" button above.

AND If you find this post helpful, be so kind to share it on your Facebook wall or in other social networks using one of the buttons below. 

21 Sep 2015

PAYING CASH FOR A HOUSE

The reader's email below on getting a homeloan and paying it up quicker or paying cash for a house made me think a bit. All I can do is give the pros and cons of each option. I have done all three when I was trying to find my spot in the real estate space.
Kitchenette plan for the new student accommodation
Here goes our question:
Hey Mbini

Hope your are well.

I just wanted to get your take on ways in which one should pay for a house. Would you advise a new home buyer to get a home loan or pay the house cash if they have the money? And if one opts for a home loan would you advise they pay it off as quick as possible?

Thank you
I love your BLOG!!
Thanks for your question Miss P. This blog is keeping me sane on so many levels. I am currently busy with my biggest renovation so far and have limited time to write. All my free time is spent shopping for building material and drawing layman plans. I will share details of acquiring and adding value to this property hopefully soon. I find your questions much more interesting and thought provoking than my soapy mortgage and dust sniffing stories. With my current schedule I only find quiet time to write just before bed. I am very glad that more than a few people benefit from my writing. This blog is my happy space.
Back to the question at hand: Getting a mortgage and paying it up quicker versus paying cash for a house.

Option 1: Paying Cash for a House
Taking a simplistic view to this option can lead to a conclusion that it is the cheapest way as one saves on the interest that would be paid on the homeloan. The major benefit of this option could be more mental than financial. Knowing that one owns the property fully can afford them peace of mind. Peace of mind cannot be taken lightly. Let's face it, it is a nice feeling not having to pay for any monthly installment. I have enjoyed not having a homeloan each time I had none. I may never ever enjoy that ever again but it sure is a nice feeling.  I especially prefer not having a homeloan on my primary residence as its debt attracts no tax benefits.

The other advantage of paying cash is the bargaining power it affords one. It is a fact that all sellers would prefer to sell to the cash buyer. You can easily make a ridiculously low offer as a cash buyer and have it accepted. Its true that "cash is king".
Just the other week my agent got a bargain piece of development land at R1.2M asking price. Within a few days the seller got a cash offer to purchase for R800k. He immediately told my agent that he is not looking at any new offer that is not cash and will be selling to the R800k guy if he does not get a better cash offer. Sellers  don't want the stress of the buyer not being able or taking too long to secure a mortgage, changing their mind, etc. cash buyers often get better deals. These benefits make paying cash for a house seem to be the most attractive option.

Option 2: Getting a Home Loan and Paying it Faster
Option 1 does look great, however financial life is more complex than that. There is never a simple YES or NO solution  to any investment decision. There are a lot of factors involved when taking wealth building decisions. The most important of those factors being the opportunity cost. The dictionary definition of the opportunity cost is "the loss of other alternatives when one alternative is chosen". One has to consider a number of alternatives that would have been explored with that amount of cash if it were not tied to the home investment.

I will make an example of a R1M (R1,000,000) house paid for in cash. And just to be realistic for current South African interest rates, I will look at the 10% homeloan interest. If your home is paid for in cash, it is paid for and that is it. You save about another R1M in interest that you would have paid over the homeloan period of 20 years at 10% and gain some more in capital growth of your home. You also save a bit in interest if you get a mortgage and fast track its payment.

Lets now look at the case where the same R1,000,000 (R1M) would have been saved in a bank account (investment) or bond that earns 10% in interest. Remember that those are more secured, which makes our calculation a bit more realistic compared to using a higher risk and higher return investment. Over the 20 years period your R1M would turn to just above R7,328,000 (R7.3M). You and I know that you can do better if you use a stocks related investment vehicle. (I am not going to complicate this equation by factoring in the alternative shelter variable, sorry.)

The only difference here is that with your home paid for in cash, your money is tied into one illiquid asset. Whilst saving or investing your R1M in one or more other more liquid asset classes may offer more risk combating benefits.

Option 3: Deposit a Few Properties
Ok, I had to throw in this third option. It is the approach that I would personally take based on my own focus strategy. Paying cash for a house is something I have done a few times in my early days by the way. Whilst it gives this priceless feeling, not taking advantage of the power of leverage does not sit well with most property investors. I would take the R1,000,000 and get into serious real estate debt. It would probably be my 20% equity to acquire R5,000,000 worth of investment property. Using it as a 10% equity to a R10,000,000 (R10M) worth of investment property sounds even better. Oh well, that is just me. This approach carries tons of risks. But those risks are shared with the lending institution.

I will revisit blogging on building wealth through "the power of LEVERAGE". My latest acquisition with no deposit or down payment is a great example of this.

One needs to do a lot of research before investing their hard earned cash. If one has no clear focus strategy, they should invest in education, a mentor or a coach. In the previous post  on Building Wealth I was looking at a simple three phase approach on creating and growing wealth.

 Note:
Thanks for the amazing emails. I respond to each and every email I receive. I keep all emails anonymous when I  respond to them through this platform. Feel free to make a follow up question or comment using the "Contact Us" button above.

If you find this post helpful, be so kind to share it on your Facebook wall or in other social networks using one of the buttons below. 

16 Sep 2015

BUILDING WEALTH

A steady and sustainable way of building wealth begins with a focus strategy. That’s the gist of the message that I have for the reader who sent me an email below recently. Thanks CV for your email.
Here we go:
Hi to the recipient of this email,

Your blog that I just read is very inspiring. Pardon my poor English firstly. I would like to tell you my story.

I am a varsity dropout and started working a year ago. I just turned 21 a month ago and I am earning steady income currently of R10 000. I am living with my parents and my current work circumstances is about to change as I am working in the engineering industry which I also started my studies in but
did not finish. My parents are on the verge of bankruptcy. I do not want to fall into the same "rat race" as described in "rich dad, poor dad".
I have built a reasonably good credit record so far. I haven't made any permanent debt except for a cellphone contract. I am an entrepreneur at heart and I am very interested in letting the little amount of money I have work for me. What would you recommend I do?

I feel exactly as described by your blog. I want to LIVE. I do not want to
work to live.

I hope to hear from you soon and to learn as much as possible.

Kind regards,
C V
As I already mentioned in my introduction above CV, building wealth starts by drawing a focus strategy. Most people fail to recognise the power of being intentional and deliberate in the way they lead their lives. Luck may cut it but taking conscious steps stands a better chance. You are obviously on the right track because you already know where you don’t want to be. And that is in the “rat race”. But do you know where you want to go? You mentioned entrepreneurship and having your money work for you. Those are both causes worth fighting for. For you to reach where you want to go you will need to take the three steps listed below:

Earn Enough

Building wealth starts with earning and earning enough. We all know that any amount saved is better than nothing saved at all. What beats saving any amount is saving more than just any amount. One can only save more when they earn more. And one can earn more when they empower themselves. If you love your current job, get yourself skilled in doing it better to attract better opportunities. One needs to be proactive to get themselves where they want to be.

If you think of a way to earn even more than your salary, explore those options. Side hustles are always a great way of fast tracking growing wealth. Explore your passions, talent and skills and try to monetise those. Opportunities do present themselves when we are busy working on bettering ourselves.

I will not waste your time explaining how you need to take charge of our expenses. You seem to be mastering that one already. Staying with your parents for as long as possible could be one way of cutting costs. It is only when we spend less than we earn that we stretch our rand.

Save More
After having earned enough for building wealth, save at an escalated rate. This is where most people miss it. They earn a high income and spend it all and then some. High income exposes one to higher credit, which can translate to higher debt. The fact that you qualify for higher credit to buy a bigger house, car or whatever luxury does not mean you should go out and buy those. Wise people live below their means.

I have written a few articles on paying yourself first. Draw a budget to determine how much you need for each month. What helps in drawing a more accurate budget is tracking your spending for a few months. In that few month keep the receipts for all your expenses and have them recorded in the spreadsheet. I actually swipe my card and do electronic transfers everywhere possible for my spending to ensure that I have everything on record. I cannot be trusted with keeping small pieces of paper.

Using the monthly records of how much you are spending, draw up a budget. In your budgeting start with shelter, transportation, food and all the basic needs (your must haves). Add a small amount of wants to your budget (your good to have). Cut out wants that are unnecessary like the gym membership and the pay TV. Those are always my favourite victims. Hopefully you can cover all what is in your brand new budget with 60% (R6000) of your income or less. That leaves you with 40% (R4000) or more of your income for saving and investing.

Make a thorough research on interest earned by bank accounts like a money market accounts. Open the highest interest bearing transacting account of your choice at the bank. (Mine earns 5.6% and requires a minimum of R5000 to open and keep). This bank account will keep your short term savings. Some refer to this account as an emergency or contingency fund. Name it whatever you wish, just open and use it.

The purpose of this account is to handle emergencies. Some people prefer to keep 3, 6 or 12 months’ worth of monthly expenditure in their emergency accounts. If you go for 3 months, you will not need R10,000X3 (R30,000) but R6000X3 (R18,000) if we make assumptions based on our example on budgeting above. This has to do with what you need to go through the month and not what you earn. I take this to be the most crucial step at creating, preserving and building wealth. Even at these low interest rates, you are benefiting from the compound interest. See this article on the magic of compound interest.

Invest Even More
Still on building wealth and taking it a step further by investing. Think about LIVING well, attaining financial freedom when you can still enjoy your life and retiring when you want to. I would say that before you even start with different forms of investing, get yourself a good retirement annuity to take advantage of the tax benefits.

Read my recent articles on tax free savings here, here and here and see what vehicle you can use for your long term savings/ investments. I am a fan of exchange traded funds as a passive form of stock investing. You will need to do your own research to see what works for you. Keep empowering yourself on what is available on the market. At your age, you can build a lot of wealth from very little. You have 19 years to 40 and 14 years to 35, if you decide to retire then. Your investment decisions can be planned around the amount of time you have before your planned retirement.

Other asset classes that you may invest in include property, bonds, stocks, etc. Your investment asset has to earn you capital growth and create passive income for you over time. Re-balance your portfolio from time to time as you are continuously building your wealth. A diversified portfolio is generally lower risk.

In conclusion, my own formula with creating, growing and building wealth is in three small stages. Those are earning enough, saving more and investing even more. Thanks for your question again CV. Please read the article I wrote for my sister who was starting out in this link: Building Wealth from First Job.

Note:
Thanks for the amazing emails. I may take longer, but I respond to each and every email I receive. I keep all emails anonymous when I do respond to them through this platform. Feel free to make a follow up question or comment using the "Contact Us" button above.

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