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Rates

5 Points to Keep in Mind when you Refinance Property

By | Invest, Rates

HOW TO MAKE CASH FLOW AVAILABLE THROUGH REFINANCING

Not everything in property investment is about the cash flow generated from rental income. There is another leg to your returns that often dwarfs the cash flow generated from rental income minus your outflows: The capital growth or equity in a property.

You can access this capital growth or equity by selling your property at a higher value than you purchased it. This, however, incurs costs such as agent commissions, bond cancellation fees and capital gains tax.

Or you can refinance, which allows you to access the capital growth in your property and keep the property. Refinancing is to finance something again, typically with new loans at a lower rate of interest. The beauty of this strategy is that the refinanced funds are accessed tax-free since you don’t pay tax on refinanced money.

Keep these five points about refinancing in mind:

1)  BUY BELOW MARKET VALUE

If there is no equity, you cannot refinance. Your property must be worth more than the debt on the property to refinance. One of the best ways to achieve this is to buy the property below market value.  In one of our previous articles, Ready, Set, Negotiate, we discuss why someone would sell a property below market value.

2)  UPDATE YOUR ADMIN

When you refinance, banks request the latest annual financial statements of the entity that holds the property, up to date lease agreements and information about your finances. Have all this documentation in place.

3)  LOOK AFTER YOUR CREDIT SCORE

Without an excellent credit score, it becomes challenging to refinance. We discussed this in more in the following article, 5 Ways to Finance your Properties.

4)  USE YOUR ACCESS BOND TO STORE YOUR REFINANCED FUNDS

Once you have refinanced your property, immediately put those funds in your access bond to avoid paying unnecessary interest. When you refinance, your monthly bond payment could increase, but while your funds are in the access bond, it could reduce the monthly bond payment.  You can read more about how to use your access bond in the following article, Start Using Your Access Bond Today.

5)  KEEP SUFFICIENT CASH RESERVES

Do not spend all your refinanced funds on expanding your portfolio or settling other debt. Even though you now have capital available, make sure to keep an emergency fund in one of your access bonds. I always keep 10% of the value of my properties as cash.

And there you have it. If you want to free up cash or grow your property portfolio, refinancing is the way to go!

– Jaco Grobbelaar

The Interest Rate Drop is GREAT for South African Property Investors

By | Invest, Rates

USE THIS INTEREST RATE DECREASE TO GROW YOUR PROPERTY PORTFOLIO

On 19 March 2020, the Reserve Bank announced a 100 basis points (1%) reduction in the repo rate. Amazing news, right?! Then they announced ANOTHER 100 basis points reduction! That means a 2% drop in interest rates in less than a month!

If your money is lying in some fixed deposit account earning interest, it’s not great news. However, it’s phenomenal news for anyone with debt, but especially for property investors with significant debt backed by assets that are appreciating (good debt).

To put this into perspective, you will save R20,000 per year or ±R1,700 per month for every R1,000,000 bond that you have. If your investment property had a shortfall of ±R1,700 per month, suddenly you will have no shortfall at all! And if you had a surplus, your monthly surplus is suddenly ±R1,700 more.

But why is the Reserve Bank reducing interest rates so much? Well, their focus is price stability, i.e. to keep inflation under control. When inflation is under control, the Reserve Bank can reduce interest rates to stimulate the economy and economic growth. Many economists expect to see a further reduction in interest rates during 2020.

However, be warned, interest rates will probably increase in the medium to long-term. You need to be prepared by having cash reserves in place for your property portfolio. Build these reserves up by refinancing your properties and keeping those funds in your access bond, so you don’t have to pay interest.

How can you benefit from these interest rate reductions?

In our article, How The Property Market Will Look After COVID-19, we concluded that it is still worth investing during these uncertain times. We also discussed the current opportunities and threats to property investment. And with our free one-hour webinar, we discussed COVID-19, the Moody’s downgrade and how to structure your property portfolio. Download the recording for free here.

The decrease in interest rates would usually cause property price growth. However, the global and national uncertainty and the current economic challenges are creating fantastic buying opportunities for the short to medium-term. You will be able to buy good assets at excellent prices. And the lower interest rates also make it more possible to acquire and service the (good) debt on these assets.

At the beginning of 2020, we published an article, 5 Reasons To Build Your Property Investment Portfolio In 2020 Despite The Lows. This article is even more relevant now if you’re willing to take a risk and build while everyone else is running scared.

-Jaco Grobbelaar

Make the Most out of the Lower Interest Rate

By | Invest, Rates

HERE’S WHY PROPERTY INVESTORS WIN WITH THE LOWER INTEREST RATE

What better way to start a week than with good news on the property investment front?! This past Thursday, the South African Reserve Bank’s Monetary Policy Committee announced a cut in the interest rate from 6,75% to 6,5%.

Now, you might say, “Why is everyone making such a fuss about such a small cut?” Let me tell you… The last time the benchmark interest rate was cut was March 2018 and last week’s cut, combined with the recent petrol price cut, is a relief for salary-earners and property investors alike and also good for market sentiment.

The first big win from the interest rate cut is the lower prime lending rate, which is usually the lowest rate at which banks start lending to clients. Right now, the lending rate is 10% instead of 10,25%, and over time, this means better cash flow for property investors.

If you are an existing property investor, you will save ±R16 a month per R100 000 borrowed. Therefore, on an R1 million loan, you will save ±R166. This might not seem significant; however, for a 20-year loan this becomes an R40 000 interest saving!

The second win from the interest rate cut is for first-time property investors. The lower interest rate means borrowers should find it a little easier to qualify for a loan.

Lastly, with most people’s budgets under pressure, the lower interest rate provides a bit of breathing room and makes property ownership more affordable for everyone.

And although the interest rate cut won’t solve all our problems, it’s a great opportunity to further your property investment portfolio. So, go ahead and make the most out of the interest rate cut and win, win, win!

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