C an you relate to Bob ’ s statement in your property investment journey ? Sometimes it seems as if all the banks want to do is hold onto their money , but that is not entirely true . Banks are in the business of lending . They make their money by lending money to people and entities that will pay them back with interest .
“ Business owners and freelancers often think that it is impossible for them to get financing from the bank because they are self-employed . The reality , however , is that banks want to help all industries and types of people ,” says Marléze Moller of My Home Loans .
Below are five tips on how you can improve your chances of getting financing as a self-employed person or freelancer .
1Structure your business , property portfolio and income
Banks like structure and the more structured your business and income are , the better your chances will be to get financing . That is why I recommend that you run your business through a company with its own bank account and annual financial statements . Even if you run your business as a sole proprietorship , still run it through a separate bank account and set up annual financial statements .
It is also not a bad idea to pay yourself a fixed salary from your business on a payslip with PAYE and UIF deducted . It just brings more structure to your income from a bank ’ s point of view . Keep in mind that if you are making a profit , you are going to pay tax whether you keep the money in the business or pay it out to yourself . And because your income tax is calculated on a tax scale , you will pay less tax in your name than a company up to a certain value .
It is also wise to purchase your properties in an entity such as a trust or company ( with the shares held in a trust ) and run it like a business with its own bank account and annual financial statement , especially if you want to buy multiple properties and plan to build a property portfolio .
2Update your admin
Banks need certainty that the person they lend money to will repay them timeously and therefore , the banks need to see a track record . This means the banks require certain information from you .
Banks usually request annual financial statements for the last two or three years , and the management accounts for the current year for your business . Financial statements play a big part in the credit decision as they have to prove income / drawings . If the business is paying for your expenses , this needs to show in your financial statements .
Suppose you already own property in the entity acquiring a property . In that case , banks will request the latest annual financial statements of the entity that holds the property , management accounts , updated lease agreements , etc . Be prepared and have all this documentation in place .
An IT34 , which is your income tax assessment , can also help with the credit decision . For commission earners , the banks usually look at the IT34 or IRP5 and six months ’ payslips to determine the average income . An IT34 might not always be a true reflection of personal income , because as business owners and freelancers know , you can always draw more from the business if need be .
“ It is very important that you speak to your accountant . Ask your accountant where they have declared the income . Go through your financial statements with your accountant . Don ’ t just assume everything is in order . Don ’ t be so obsessed with not showing a profit and not paying tax , that you can ’ t get financing for a property ,” Moller adds .
3Improve your credit score
When using Other People ’ s Money ( OPM ), you need a good credit record . Although it is noble to have no personal debt , it is a disadvantage when you want to use the bank ’ s money to build your property portfolio as you need credit to get credit . Start with a small limit on a credit card , an overdraft , and a clothing account or two . Always pay your bills on time ! And remember to check your credit score annually . The better your score , the better the financing you ’ ll get .
4Use a bond originator
Banks compensate bond originators , so it won ’ t cost you anything for them to apply at all the banks for financing and assist with the negotiation of your loan term and interest rate . My bond originator can almost always get a better deal from the bank than what I can .
Bond originators work with financing applications every day from morning to night . They know how to submit an application and the best way to present your information to the bank . Don ’ t be afraid to negotiate and send the proposal back if you are unhappy with it . I often get better interest rates and terms simply by asking !
5Apply at multiple institutions
I often get better deals from banks other than my own . Remember , each bank ’ s strategy and risk appetite are different at different times . Don ’ t assume that your bank is most likely to give you a home loan or the best terms . You would be surprised what great offers other banks can make you as all the banks are competing for your business when you are buying a property .
With these great tips , you have no excuse not to build your property empire with OPM ! So , go forth and get financed .
SOURCE Prosperity Enterprises
SA Real Estate Investor Magazine OCTOBER / NOVEMBER 2020 21