For those who believe in the merits of property investment and wish to grow their portfolio, perhaps the most critical hurdle to overcome will be sourcing suitable property finance.
Many of the mainstream retail banks are less eager to finance investment properties than primary residences.
I presume this is because these banks believe that individuals are most likely to prioritise the stability of their homes and family, and so are more likely to honour their monthly bond repayments on their primary residence before any other financial commitments.
An example of this is how these banks treat investment property rental income. As part of any property finance application, banks require an investor to submit an income statement detailing all monthly income and expenses, thereby demonstrating that the investor has 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. A bank’s unwillingness to take this income into account can spell the end of the bond application and hence their property investment.
Most of the mainstream retail banks aren’t keen to take the proposed rental into account for first-time property investors, and if they do, they only consider a portion of this rental income. 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 – again rather opting to only take a portion of the existing rentals into account, which is often capped at 70%.
One way to overcome these challenges is to ensure that the bond application is supported by copies of existing signed lease agreements and bank statements proving consistent rental income from the property in question. A complete and well-organised bond application will be well-received by the banks and ensure your best chance of approval. If there is an existing tenant some of the 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 which has a more entrepreneurial view on property finance rather than a one-size-fits-all approach. These banks back the investor and consider each proposed investment on merit, taking all rental income into consideration. However, these banks 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 is 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 of this is that as the property grows in value, the investor is able to 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 the investor time and money later as there is no need to register a bigger bond down the line when more finance is required.
Some may find the obstacles in raising bond finance for property investments too daunting, but those budding investors who push hard, make sacrifices and find a creative solution to financing their first investment property will discover that each subsequent step in the right direction will open new doors to finance and therefore further property investments.
Gareth Bailey is area principal for Durban coastal at Pam Golding Properties.