This question of what is IRR Internal Rate of Return is one of the most frequently asked questions and often even when explained property investors that do not have a financial background, do not fully understand this concept. In this article we are explaining in the simplest way possible what is IRR or Internal Rate of Return.

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In property investing the terms described in this article are very crucial to understand because property investors need to make real profits and returns on their investments.

Most people and property investors regard income as just that, income. It comes in, it’s a form of profit and it means your business is thriving. A more important thing than making money is receiving it. The timing of cash flows (the day you will receive it) is easily the most important thing in managing any business’ finances and ensuring that you continue to make profits.

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In the previous article, I spoke about the importance of cash flow and the discounting thereof.

The next step is to identify the relevant cash flows. Firstly; what is a relevant cash flow?

A cash flow will be relevant if it can be changed or altered by a future decision. For example; if you choose to buy a building, you will make rental income, but, you can also choose not to buy it and therefore not receive rental income. An irrelevant cash flow cannot be altered by a future decision. For example; if you own the building you will have to pay rates and taxes whether you rent it out or not, you cannot make the decision not to pay as long as you still own the building.

So, where to start? Firstly, decide what your plan of action will be.

What asset are you buying?

What cash generating purpose will it serve?

How long do you intend to keep it?

Then identify the costs and the income flows related to each step. Things such as: income, rates, general expenses in the production of income, selling price at the end of its useful life and most importantly, the tax implications. The tax implications must be analysed on the sale, the income generated and the expenses. Most of these figures will have to be estimated from current market data and capital growth potential of the asset. Notice that we do not take into account interest or loan re-payments; these are factors of our cost of finance and your degree of affordability and are taken into account in our discount rate.

The next step is to identify when you will incur these costs. Some costs are incurred yearly whereas others are only incurred once or twice during the life of the asset.

Often, people who own investment, or even private properties, re-finance without calculating the cost involved or having a proper understanding of the situation.

What is a re-finance agreement?

When you first submit a request for a bond on a property, the bank assesses the value of the property you wish to buy and grants you the bond at the fair market value of that property. So, suppose you wish to buy a house for one million, the bank will offer you one million, depending on your affordability. They offer you this amount because, should you default on your debt, they can repossess the property and sell it at that fair value, thereby getting back their money. This represents very little risk to the bank. However if the property market in the area is in decline – then this would be very big risk to the bank as the bond given won’t cover the selling price they can get (should they need to repossess).

Often, the value of property increases. Suppose that house is now worth 1.2 million. Should the bank repossess the property, they could probably get 1.2 million for it when they sell it. Therefore, the bank offers you a loan extension (an increase in your maximum loan) of 200,000. You can therefore take out a further loan of 200,000, using the property as collateral.

What people must bear in mind is that this is not money in your pocket; it is an increase in the loan amount of 200,000 which will have to be re-paid over the lifetime of that bond. Most people believe that it is money they simply receive and can therefore use to either lower their bond or for personal use. The simple fact is that the value of the asset which is up as collateral, namely the house, has increased and the bank therefore extends you a possible increase in the loan amount.

Finance is always a worrying factor when starting any business.

• Where will I get it?
• How much will it cost me?
• Will this severely cut my potential profits?

Before you dive into financial management, you must understand its most important element; CASH FLOW.

In these tough times one of the most frequent questions is “What do I do if I am over exposed and can’t pay the bond/s?”

Here are some practical solutions out there that others have employed:

1. If you can’t pay the bond but the transfer has not take place yet, in other words you have bought into a development, please read this article: Property Transfer Nearing No Money to Pay the Bond . 
2. If you have too many properties and the bonds are killing your financial position consider selling some urgently.
3. If you can’t sell at the price you want consider reducing your price to sell at absolute bare minimum.

This is actually two questions, often asked together. We will try to answer both, as these issues are very connected in more than one way. Hence the question should really be: Should one buy if not money is available to do so and if the answer is yes, then how would one go about buying.

This question has as many answers as there are individual circumstances. The truth is that many investors have purchased more property via re-financing money from existing equity. But this has to be taken into consideration with affordability as well, because re-financed money actually costs money. Banks do not lend money for free of course.

This article is a short comparison for two bank products. Many people asked what is the difference between ABSA buy to let offering and Nedbank. We asked Donnie Claassen our resident Financing Expert to help us out on this one.

You can contact Donnie here   with any questions or comments on this article if you need clarifications.

Before starting it is important to remember that every bank creating a product has certain criteria attached to it. As you see everywhere “Terms and Conditions Apply”, this also applies to bond products.

In the last few years many developments have sprung and investors bough often more than one property. Though these could have been great investments some problems have been noticed with the fact that developments take time to develop and register at the deeds office.

For many economic reasons including the increases in interest rates, some investors found that their affordability has changed since the time they placed the offer to purchase and were granted the bond. They have overextended themselves, didn’t know at that time, and now don’t know what to do to save the situation.

Can’t Pay the Bond? This is how you can save your property and avoid repossession.

It is sad see that there are many property investors and home owners that can’t pay their bonds  due to the recent interest rate increases. To add to the trauma, many have refinanced properties to the extent that getting a quick sale in the open market is close to impossible as there is no equity left to make the deal attractive to another investor.

This makes the situation very unpleasant and dangerous for the credit records of such persons. These incidents seem to leave the property investor or homeowner stuck, panicked and very emotional about the situation.

There are however a few solutions that come from the most unexpected place – the banks.

The term negative gearing is not very widely used in South Africa by property investors, in fact if you Google it you will find mostly Australian domain’s. Though the term is not widely used, we found it is extensively employed as an investing strategy and often with little knowledge of its’ meaning and consequences.

In this article, we will look at negative gearing and try to best explain what it is, and how negative gearing affects property investments. Negative gearing, generally speaking, is an investment strategy. However, just like with any other strategy, it can be good or extremely risky, if one doesn’t know what it entails.