If you are looking to buy a ‘second property’ based solely on the strength of the potential rental income of that property. Think again. Generally banks will not lend you money solely on that basis.

Here’s what you need to know:

The income generated from a second property will be taken into consideration on a discounted basis. What does this mean?
If the potential income is R8000 per month, banks will only likely provide funding to the value of R6400 per month, a discount of 20% (as a start).

Ultimately banks are lenders and lenders prefer low and determinable risk. Their core business is not to ‘help you’ but to write upfront fees, earn interest income and be repaid in full on all loans extended.

Write offs and inconsistent repayments are not good business. That’s why there are credit scores. Banks want to lend to the most predictable client.

In order to be successful at acquiring a second property, you must be able to show affordability on a ‘stand alone’ basis for any additional property.

In other words, be able to show an independent and consistent cashflow that will service the loan on the second property.

Because when that property doesn’t have a tenant and can’t generate an income, you won’t be able to make the repayments and banks don’t like that who would?

It gets easier if you are able to show consistent revenue from other properties or sources of income so reliance for repayment can be placed on that opposed to solely the potential rental income of the ‘second property’.

Pro tip:
Keep a good account of your income and expenses to be able to show free cashflow clearly.
Keep the money you would use to service the repayments on the second property in a separate account to show clear affordability.

This could become handy as a deposit, the payment of transfer costs or any renovation work required.