Fi­nance an in­vest­ment in prop­erty

The Citizen (Gauteng) - - PERSONAL FINANCE - Gareth Bai­ley

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.

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