What if we use the bank’s money when financing a property investment? How would that affect your return on investment (ROI)? For one, the bank’s money is going to significantly reduce the capital you’ve invested. Let’s do a little comparison to show you how bank financing can sometimes give you a better return on investment.
On the left we have a cash-financed deal and on the left we have a bond financed deal.
What’s going to change, first of all, is our borrowing costs. When you use a bank, you’re going to have to pay a bond registration cost. See the screenshot below to see what that means.
We have transfer costs and that’s fine, but because we are registering a bond, we have an additional R28 996 that the bank’s going to charge us. Instead of only paying R22 958 in transfer costs, our total transfer cost is R51 954.
Renovation costs stay the same in both financing types.
Holding costs, however, will change when using bank finance because you’ll have to pay your bond every month.
So, you’re holding costs increase with bank financing.
Estate agent commission stays the same.
Now, take a look at the capital costs below.
This obviously doesn’t look that good, but remember, the capital invested is not the full purchase price. The capital invested is now only 10 percent of the purchase price because you only have to put a deposit down. You don’t have to put the full amount down. So, your capital investment is now only R201 954 – making your return on investment higher.
Nothing has really changed other than the fact that we’re not using our all of our money when using bank financing. The money we’ve invested in the bank option is working harder than if we had to put it in the cash option.
Bank financing demonstrates the power of leverage. It’s leveraging other people’s money because you can do four or five deals with the same amount of money that you’re putting in with cash. You can do three property investment deals like this in the space of time that takes you to do this one.