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Monday Feb 18, 2013

When can one mortgage a property to finance a business venture?

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.

Rawson Properties Press Release

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