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How to purchase investment property - for free

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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 mortgages?
 
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.

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