Finance an investment in property
Many mainstream retail banks are less eager to finance investment properties than primary residences. As part of any property finance application, banks require an investor to submit an income statement detailing all monthly income and expenses, to show they have sufficient free cash flow to pay for the monthly instalments on the bond being applied for.
For most property investors starting out, the expected rental income from the proposed investment property forms an important contribution to the affordability of their monthly repayments. Most mainstream retail banks aren’t keen to take the proposed rental into account for first-time property investors; if they do, they only consider a portion of it. The same applies to existing property investors buying another property. In this scenario, unless the investor has a strong track record, these banks will take the full bond instalments on each of the existing properties into account, but are reluctant to consider the full rental income generated by each – opting rather to only take a portion of the existing rentals into account, often capped at 70%.
One way to overcome these challenges is to ensure the bond application is supported by copies of existing signed lease agreements and bank statements proving consistent rental income from the property in question. If there is an existing tenant some banks will consider including a percentage of the rental income with proof of the monthly deposits and the existing rental agreement.
Another option is to seek out a specialist bank with an entrepreneurial view on property finance.
These banks back the investor and consider each proposed investment on merit, taking all rental income into consideration. But they have criteria for the clients they finance, including the investor’s profession, strength of earnings and balance sheet.
Once a bank is willing to grant finance, an investor may consider registering a bigger bond than the initial property finance amount. For example, it’s possible to ask the conveyancer to register a bond in the deed’s office for R2 million notwithstanding that the bank’s loan is for a lower amount of R1.5 million.
The benefit is that as the property grows in value, the investor can refinance the property, subject to another credit application, and increase the property finance up to the registered threshold to make more funds available for subsequent property investments. Registering the higher bond amount upfront saves time and money later.