Real Estate Investor Magazine South Africa August 2015 | Page 30

STRATEGIES

Buy-To-Let Business Finance
The business of buy-to-let
BY KOOS DU TOIT

M

ost businesses require start-up funding
initially, as well as funding to grow and
expand the business later on. A buy-tolet business is no different, although the finance
used in a buy-to-let property business is often a
mortgage loan.
The right finance is not only essential to
the success of a buy-to-let business, it will also
significantly impact cash flow and exponentially
increase the return on investment. This is because
the right finance allows the buy-to-let property
business owner to harness the power of gearing,
which is simply borrowing money to invest in an
asset.
What is the right finance?
So, what is the right finance for a buy-to-let
property business? Preferably, it is a 100% mortgage
bond at the prime interest rate or lower, offered
with suitable terms and conditions.
The prime interest rate currently stands at 9.5%.
At such a low rate, an offer of prime + 2% may not
sound too bad, but when interest rates increase – as
they inevitably do – this interest rate may well leave
the buy-to-let property business with unaffordable
bond repayments.

“The right finance allows the
buy-to-let property business
owner to harness the power
of gearing.”
Whatever the current interest rate, buy-to-let
property businesses must calculate their cash flow
projections on a 12% interest rate, which is the
long-term average. This allows them to build a
buffer against interest rate hikes without impacting
their cash flow and jeopardising the long-term
success of their property business.
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AUGUST 2015 SA Real Estate Investor

Getting the right finance
As a result of the global credit crisis and the
implementation of the National Credit Act, it is
not as easy to obtain mortgage finance as it was
some years ago, but it certainly does not mean
that it is impossible. A crucial first step is to set
up a correctly structured trust in which to acquire
investment properties through which to operate a
professional property investment business. Trusts
are also exempt from the National Credit Act,
streamlining the finance application process.
Buy-to-let business owners must also keep their
personal credit records clean at all times and keep
personal, trust budgets and accounts that accurately
reflect income and expenses. Before applying for
finance, each and every property investment
opportunity must be investigated thoroughly to
ensure it is a viable investment and that the value
of the property will provide sufficient security
for a loan. Accurate and conservative cash flow
projections for a number of years, demonstrating
the financial viability of a potential investment,
will make for informed and intelligent decisionmaking, both within the business and at the bank.
Professional assistance
Buy-to-let property business owners will find
the services of a professional bond orig