How To Use The Banks Money To Build Your Property Empire
You don’t need millions in the bank to build an impressive property portfolio.
It’s a property investment myth that’s done the rounds for years!
But what if I told you that all you needed was the bank, a tenant, and my refinancing strategy and you could get them to pay for your property for you.
Better yet, you could even use this strategy to pick up as many properties as you’d like, no matter what affordability the bank limits you to.
Simply read on for more…
Getting The Bank To Pay You For Your Properties Through Refinancing
Firstly, you need to understand what refinancing means.
Let’s imagine that you buy a property at an auction for R300,000 (including all costs such as transfers costs and previous debts).
You then renovate the property with R225,000 and push it back to market value.
With the value that you added the property is now worth R750,000.
You can then go to the bank and ask them to put a mortgage on your property.
Someone from the bank will inspect the property and confirm the value of R750,000.
They will then confirm your affordability (IE can you pay off the bond with your current income vs expenses?)
Once they’ve done all of their checks they will decide how much Loan to Value (LTV) they will provide, which in South Africa can range between 70% and 90% (I have seen cases of 100% LTV, but know that this is extremely rare).
Let’s say that the bank gives you a 70% LTV which means they will mortgage the property at 70% of its market value.
70% of R750,000 is R525,000, which is what the bank will give you for the property.
That means if you paid R300,000 for the property (and all its costs), and another R225,000 to renovate the property back to market value, you are in the deal for R525,000.
This means that the bank is paying you back for your entire investment, so you ultimately have none of your own money left in the deal and would need a tenant to then pay off the banks investment.
This, in the professional property investment world, is a CHA-CHING situation.
The Smart Way To Buy More Property Even If The Bank Limits Your Affordability
Refinancing is usually the second part of a property purchase.
No bank is willing to invest in a run-down property, and therefore you won’t get refinancing until the property has been renovated. This is precisely why you must ensure that you have enough of your own capital to finish a deal, before going to the bank for a refinance opportunity.
The trick in South Africa is that access to finance is limited.
The banks will often use your salary as an affordability measure without considering any of your rental income.
This means that even if you have a few positive cash-flowing properties the bank may still be resistant to loan you more money when your salary cannot fit the bill.
I like to use refinancing to be able to reinvest in more properties without being limited by the bank’s assessment of my affordability.
Also, leaving your hard earned cash in a deal is sometimes not worth the return.
If we take the above example, let’s say that your rent covers your expenses (making this a cash-flow neutral deal).
The R525,000 that you received from the bank can be used to buy another auctioned property, renovated again to the same value and then refinanced.
This now means you have two assets and you still have the R525,000 left over to be able to invest in another deal.
Do you see how you can fund a few properties using this strategy?
There is one thing to note about this strategy - Although it’s very logical and used by many professional property investors, one must be cautious of the tenancy market in South Africa.
Unfortunately, the tenancy law favours the tenant and not the landlord.
I’ve even heard of instances where tenants stay in properties for over a year and don’t pay one single month’s rent!
It’s extremely important that your letting agent screens the tenant before any paperwork is signed, and that you have some insurances in place for any potential dead months that may occur.
It may sound a little complicated, but let’s simplify it by using a step by step example.
The 3-Step Strategy You Need To Put This Into Action
Step 1: Buy The Property Below Market Value
Remember the first rule of property investment, you make your money when you BUY!
I never buy based on a glossy brochure, I buy distressed properties because there is equity within the deal.
Let’s go through an example of a property that I recently refinanced.
I bought a 3-bedroom house that had a beautiful kitchen, but the bathrooms needed to be ripped out and completely revamped.
The garden was also in poor shape, and lastly the windows had been smashed (probably due to a fight of the divorced owners).
This property was perfect!
I heard about the property through my streamlined marketing approach (which targets distressed sellers looking for cash offers to settle their difficult situation).
I bought the property knowing full well that it had R200,000 worth of renovation costs.
The transfer costs and debt associated with the property was just under R50,000 (I also included the price of bond registration costs).
After chatting with my estate agents and doing comparable research I found that the property could easily sell for R500,000.
Because it is a small deal, I decided I wanted a R50,000 buffer and made an offer at the auction for R200,000.
I got the property for R200,000, paid the R50,000 associated costs and added R200,000 worth of value on top of the property.
I was in the deal for R450,000.
My builder, who is a core part of my power team, finished the job within 3 months.
Step 2: Go To The Bank
The property was ready and back to market value.
I called my networks within the various banks to find the best deal for me, and they all agreed that the property was worth the R500,000.
They then checked my affordability and came back to me with various offers. I received some low offers (60% LTV), but held back until I received a gem of an offer for 90% LTV.
Remember, as Donald Trump says, “You don’t get what you deserve in life, you get what you negotiate”. Don’t settle for the first offer, play the banks against each other and get yourself a rewarding deal.
90% of the value of the R500,000 property ended up being R450,000 (If you can remember, I was in the deal for R450,000).
This means that the bank paid me to get an asset! I have now created R50,000 equity in this property that’ll only continue to grow as time goes on. This was definitely a CHA-CHING moment for me.
I also ensured that the property was cash-flow positive so that my tenant would pay off the property. My letting agent spent a few weeks finding the right tenant and my insurance was in place.
To date I haven’t missed a rental payment, but my insurance is there to back me up if needed.
Step 3: Reinvest Your Initial Amount
Hopefully you’ll see that the original investment of R450,000 that I put into the property is back in my pocket, and I can re-use this to invest in another property.
Following this process, you are able to re-use/recycle your initial investments, while building a portfolio of assets that your tenants will pay off.
This strategy is very popular among professional property investors, but there is a significant amount of risk that you need to be aware of.
You need to make sure you have a proper / credible letting agent who will get you a paying tenant. If you do build a portfolio of properties but your tenants stop paying, you have a big problem!
Instead of a portfolio of assets, you’ll have a portfolio of liabilities and if you’re unable to fund the bond payments those liabilities will be taken to auction and you will be left high and dry.
You’ll also be limited by your affordability. In the end, the banks will only bond you based on your salary and affordability. That’s why I use this strategy to get the most mileage out of my money.
Three Things To Keep In Mind When Refinancing
Make sure you are bondable (IE you’re able to get a bond from a bank based on your salary). Use a bond originator to help you find the best deal for you.
Check your credit profile to ensure you get a good bond interest rate. Ask for tactics to improve your credit rating as this helps you achieve better interest rates.
If you’re buying in a complex, always check their financials. Remember, if the body corporate is not up-to-date with its payments it could negatively affect you.
The Simple Way To Get A Better Rate, Even After The Bond Has Been Agreed And Signed
Another aspect you should be aware of is high capital growth.
After holding the property for a few years you can ask for an access bond on that property or go to another bank to get a better interest rate as well as more equity (as the property would have gained in value over time).
This is known as equity stripping.
Make sure that the equity that you achieve in the property is used to buy positive cash-flowing properties, because if the property market falls, that equity will no longer exist and you will be in a deep hole without a ladder.
How To Use The Banks Money To Build Your Property Empire
Nowhere in this strategy do you need to be a millionaire!
If some of these numbers are a little overwhelming, just remember it’s taken me years to get here, and you can start far smaller and build your way up.
Whilst refinancing might mean you have to take on a little more risk in your property portfolio, the rewards are potentially massive!
Do it properly and you could very well get the bank, and your tenants, to build your property portfolio.
And you could even use this strategy to pick up as many properties as you’d like, no matter what limits the bank places on your affordability.
So, turn your liabilities into assets and get paid by the bank through refinancing.
Until next time, be bold and go build that property portfolio.
Analyst, The SA Property Investor
The Money Lab