Once you purchase a property outright it continues to grow in value as well as give you the possibility of inflation beating returns in the form of rental income and capital growth in property.
During the property boom of 2001 to 2007 property values rocketed, those lucky enough to buy at the beginning of the boom, especially off plan, could virtually move tenants into their properties upon completion of construction and ask for rentals very close to bond repayments.
The crash of 2008 brought many of those values down again and property has slowly been in a recovery process to normalise since 2009. Because of the decline, the property climate is a little less than ideal should investors be looking to make use of the cash represented by property investments by selling.
The illiquidity of property
This is inherently one of, if not the greatest, problems with property- its illiquidity. Accessing the cash value of property means selling the property outright and losing your investment, a course that most property investors are very reluctant to take. Murphy’s law says prices will be down at a time you need liquidity! There is, however, another avenue open to property owners requiring cash, which makes an investment in property even more of an attractive option.
Bridging Finance is a service provided by finance houses for individuals or businesses that require a short-term cash injection without selling the property. Traditionally used where one is waiting for the proceeds from a sale or transfer of paper, some finance houses will also allow you to take a short-term loan against an owned property for other uses. Short-term loans differ from other loans in that they have different repayments terms.
Solving the illiquidity riddle
The benefits of this course of action far outweigh those of selling. For one, cash is often required on short notice, which is not achievable with the selling of a property, which can take months.
Secondly, the cash is often required for the short term and can be recouped relatively quickly.
If cash is required on short notice, this is not possible by selling a property
The interest rate is less important as the amount required is small relative to the bigger picture of the project for which the funds may be required and is for a short period. Thus the Rand amount of interest is what counts weighed against the benefits of the loan. Traditionally this left property owners with a dilemma- to either shelve the plans they had for use of cash or sell their long-term property investment for a short-term property investment for a short-term solution, losing out on appreciating value of the property.
Solving the short term loan
The benefits though do not end there. Much of the red tape associated with acquiring finance against assets in the commercial lending sphere are overcome with term loans from private finance houses. Applying normal lending criteria, banks would often not be able to assist many investors, as they may not be able to clearly illustrate the ability of monthly repayments on a bank loan.
This means that it is often much more convenient, simpler and a lot quicker to finalise a short-term loan with a private finance house. In addition, private finance houses are willing to discuss repayment terms based on your requirements for the cash and the intended repayment of the loan.
Essentially this translates into the granting of a loan facility against the security of a first covering mortgage bond, in favour of the finance house, over an existing freehold property. You can acquire the short-term loan for something other than waiting for the sale or registration of a bond to go through and for a longer period than traditional bridging finance. However, there has to be, what is known as a “defined exit strategy”, a defined plan, on how the loan would be paid back.
MINIMUM LOAN REQUIREMENTS
- Maximum transaction value not to exceed 50% of the property value.
- Valuation of property to be done at client’s expense.
- Satisfactory exit strategy or repayment mechanism.
- Minimum advance of R500 000 to corporate entities.
- Assessment of Assets and Liabilities of Borrower and/or Sureties.
- Bond registration costs are for the client’s account.
This is especially advantageous in the current property market for investors who are seeing slow growth in real terms of the property sector who may be seeking to utilise the cash locked up in their property on other avenues for heightened growth. This is an excellent opportunity to now utilise their property as a means of achieving other investment goals instead of letting it just sit there waiting for a recovery.
By Jeffery Froom