Gearing can increase property investors' returns

Analysts who compare returns on different asset classes often overlook an advantage of buying property: a mortgage bond can be used for gearing, which increases an investor's return on a relatively small initial capital outlay.

This is according to Bill Rawson, chairman of the Rawson Property Group. Just how profitable a quick in-and-out transaction in property can be, said Rawson, has been shown recently by purchasers of Rawson Developers' units at the recently completed "The Rondebosch". A good example of this is one investor who bought a unit with a 90% bond. His unit was priced at R950,000 and, having secured a bond for R855,000, he only had to put down R95,000 deposit on signing.

Within a year he resold the unit for R1,2 million. He then paid his agent R50,000 commission. This meant that his net gain was R150,000 and his overall profit was R200,000.

"On a total initial investment of R95,000, therefore," said Rawson, "this purchaser made a profit of over 200% and has put himself in a position to repeat the process, possibly this time buying two units. Although it is unlikely that he will net quite such spectacular dividends this time, he could add a significant amount to his profit."

Factors influencing popularity

Rawson conceded that the level of profit quoted here is unusual, but, he said, there are several new Rawson Property Group developments and other development projects which will benefit in the same way from the factors that had made "The Rondebosch" so popular.

These factors, he said, are:

  • Its close proximity to UCT, Varsity College and the lively Rondebosch retail and entertainment hub;
  • The appeal of 'clean' modern architecture in established areas where many of the other buildings are now 'a little dated';
  • The enhanced security that modern intruder detection technology can impart to a new development; and
  • The widespread increase in the popularity of sectional title living in suburban high density areas.

Asked how many of today's buyers would qualify for a bond of R845,000 (as quoted above), Rawson said that Rawson Finance is currently achieving a 70% plus success rate on bond applications and this is more or less true of all the major bond origination companies operating in South Africa today: "The challenge of getting a bond is not as great as many people realise, provided they have a strong income stream."

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