These are the options available for financing your first home

Article summary

• Property investment is a distinct process from purchasing a home, as the lender knows you will not be occupying the property and may therefore require some additional assurances.
• Aside from applying for a home loan, options for financing a property investment include private lenders, home equity loans, and business partnerships.
• Certain institutions or companies may be willing to back investment if it serves the public good in some way.

There’s no safer investment than property investment, which can bring with it many financial benefits, such as rental income and increasing property value. If you’re a first-time property investor looking to expand your portfolio, you may be wondering how you go about funding a property purchase. Funding investment property comes with its own set of challenges that make it distinct from residential property.

A guide to property finance

One way in which property investment differs from residential property is acquiring finance. The lender knows that you will not be occupying the property, and thus might require some additional assurances.

With that in mind, here are some ways to finance an investment property:

1. The old-fashioned way: a home loan

You can attempt to invest in property by applying for a home loan, as you would with a residential property. As with the latter, your ability to repay the loan, as well as your credit record play the biggest role in determining whether your home loan is approved.

Bear in mind that most banks do not take potential rental income into account when determining whether to grant you a loan for a property investment.

2. Dip into your home equity

Home equity refers to the portion of your home that you already own, or in other words, the portion of capital in your home loan that you have already paid off. Market forces can also affect home equity by raising the value of your home.

You can leverage your home equity for a loan, which you can then use to fund a second home loan for your investment property, or at least the deposit for that property. Over time, if all goes according to plan, the rental income on your investment property will enable you to pay off the loan. Bear in mind that there are tax implications as an investor if you choose this option, so best consult with your tax expert first.

3. Invest with a partner or group

You can partner with others, whether it be friends, family or a business partnership to invest in a property. You pool your funds to pay for the home loan, and share responsibilities for taking care of the property. Obviously, it’s important for everyone involved in the investment to be clear on what their role is. Also discuss potential risks and reward of the investment beforehand.

4. Approach a private lender

Otherwise known as “angel investors” these are private individuals who are willing to support your property investment. Of course, you don’t just want to ask any random person to do this, it helps if there is a degree of trust. Either way, the private investor will need assurances that you are a worthy investment and that their reward will be worthy of the risk.

5. Look into public programs

Public programmes, whether they be funded by government or other institutions, can provide funding for property investment, although they usually need to serve the public good in some way. For example, the TUHF (Trust for Urban Housing Finance) is an organisation that backs the purchase and refurbishment of properties in the inner city area.

Take the first step to property investment

Whether you’re a first-time or experienced investor, ooba Home Loans, South Africa’s leading home loan comparison service, can boost your chances of achieving a favourable deal by applying to multiple banks on your behalf, giving you the opportunity to compare deals.

They also provide a range of tools that can make the investment process easier. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.