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Property generates equity through appreciation

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Finding the capital to invest in property in today’s economic climate can be tricky, but most homeowners and investors have access to capital that they might not be aware of, says Rawson Property’s Schalk van der Merwe.

One of the benefits of property as an investment is that it generates equity through appreciation.

“If you bought a property a few years ago, that property will be worth more than its original, mortgaged value today. That difference – together with however much you’ve paid off on your bond – is known as equity.” 

Equity can be “released” by refinancing a property at its present value or taking out a home equity loan. The resulting capital can then be used to finance additional investments – a popular way to expand and diversify a property portfolio.

Contrary to negative sentiment, Van der Merwe says growth over the last five years has remained strong in the Western Cape, with areas like the Cape Town City Bowl, Atlantic seaboard and city, near the eastern suburbs, experiencing more than 100% appreciation between Q3 2013 and Q2 2018.

“Average growth across the city of Cape Town was 78.2% between 2013 and 2018, which means that even if your property didn’t appreciate by a single cent over the last year, you’ll probably still have significant equity to play with.

“The only way to be certain of the numbers is to have an up-to-date valuation done by an experienced real estate agent and that’s easy to arrange and completely free of charge.”

An example of equity: An investor bought a property in Cape Town in 2013 for R1 million. They paid a 10% deposit and have been putting slightly more than their minimum repayments into their bond since then.

They now owe R720 000 on their property which is currently valued at R1.782m – 78.2% growth since purchase. This means they have R1.062m in potential equity that could be tapped into for future investments.

“By leveraging equity, rather than selling to buy, property owners are able to avoid capital gains tax, minimise financing fees and build a diversified – and growing – property portfolio that delivers ongoing returns.”

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