When reading the life
stories of successful entrepreneurs it becomes clear that, very often, at some
point in their careers they have mortgaged their homes to finance their
businesses.
Conversely, anyone
examining the books of South Africa’s more successful property investors today
will often find that they have multiple bonds on a wide range of properties or
two or three large bonds covering several properties.
This willingness to bond
properties (if and when the banks agree), said Bill Rawson, Chairman of the
Rawson Property Group, although clearly the foundation of many a fortune, has
to be guarded against and closely watched. This is especially true among young
people who may or may not be onto a good business proposition, who are in the
first flush of enthusiasm and who are prepared to ‘go for broke’ in order to
achieve their goals.
“I am frequently asked by
young upwardly mobile entrepreneurial types whether they and their husband/wife
should re-bond their homes in order to raise capital for their business.
There is, of course, certain logic in this because obtaining finance this way
is less expensive than doing it through the usual channels. However, the
risks of losing both a business and a home if things go wrong are so great that
this proposition needs careful consideration.”
In these situations, said
Rawson, the entrepreneurial couple should ask themselves two questions:
1. Will
we be able to afford higher interest rates if these come about two, three or
four years from now?
2. And will there be
sufficient cash in the business or available elsewhere to protect the home if
the business is incapable of keeping up the monthly bond payments?
“Put in simple terms,” said
Rawson, “if the business has the ability to repay the mortgage in three or four
years it is probably a viable proposition to bond the property. However,
if this is not the case, in my view, the risk might well be too great. The
trauma of losing a home and having to move into less expensive, less attractive
rented accommodation is something that no one would wish on any young couple
starting out in life.”
Where there are other
partners in the business, said Rawson, it can be a good idea to persuade them
to increase their investment in the business, thereby enabling the entrepreneur
to reduce the size of his bond or to pay it off more quickly.
Quite often, added Rawson,
the young couple’s big plan is hit by the fact that the wife falls
pregnant. Allowance for this eventuality has, therefore, to be made in
all forward planning for the business.
“Using property to finance other investments has been
a traditional way of getting businesses off the ground but it has to be
recognized, however, that in recessions, properties will often simply not sell
or sell at big discounts. This type of investment is, therefore, best
suited to companies and big organisations. The new boy-on-the-block, no
matter how brilliant and enterprising his business model, has to exercise
caution before going the bond-your-house route,” said Rawson.
