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18 May 2015

RAISING CAPITAL FOR AN INVESTMENT

Today only, I have discussed the subject of raising capital for an investment or business with four or five different individuals and groups. Because of the nature of my passion, I meet a lot of "I don't know where to start" kind of people, and the "I know what I want but have no means" sorts. I now realise that my well packaged "start where you are" response falls short, as an overwhelming majority of us doesn't really know where they actually are. Sources of capital will be broken down shortly.

Firstly, I have to briefly let you know where I had hibernated to. I missed this blog, the lessons it gives to me and the amount of sanity it affords. If you think you are learning anything from this space, you most likely have no idea how much more I learn from you. Thanks for your support.
Townhouse Renovation/ Refurbishment
Whilst I was away, I renovated an existing unit to raise the rental to an amount higher than an average asking rental in the complex and it worked. Most of my April was spent on that. Then on getting great education on managing own investment property and putting structures in place. An exciting book on retirement and real estate was sent to me for a review. And I also worked on raising capital to finance my latest acquisition which will also be sort of a commercial property. I have more than ten articles in my head on all that. The first of which is raising capital for an investment.
Landscaping a Garden of a Rental Unit
Own Savings
I know this sounds impossible, but I do have a close friend who is a debt free investor. She owes no one nothing. She has a beautiful story from nothing to being a multimillionaire (dollar multimillionaire) and that from her own small cash. With enough patience and good investment education, one can build up a sizable amount of cash and start small with flipping. Small profits build up into bigger and eventually mega profits. A few very special investors get this one right. Part of which I am not.

Taking from what you already have
An access bond facility is an amazing asset to have. If you can, request this facility on your new or existing home loan from your financial service provider. This facility acts as a separate investment or savings account and allows you to access the additional amounts paid into your mortgage. The excess amount that you pay into your homeloan over and above your monthly installment is made available to you. I know people who actually save money in their home loan by paying extra lump sum amounts or monthly additional deposits to raise money to further invest or buy a car, etc. Before you make any extra payment on your bond, make sure that you have the access bond facility in place.

A similar way of raising funds is from refinancing an existing asset. This is what I had to do with two properties for a new acquisition. I applied for what is known as a re-advance. The readvance is in most cases the difference between your current mortgage debt and the initial home loan amount. If you owe R300,000 from an initially registered amount of R1M, you may be approved for a readvance of R700,000. In my case, the advantage was the interest rates. the original homeloans were very cheap. The new homeloans from the readvance automatically get the same interest rates as the original bonds.

Of the two options, I would choose the access bond facility as a tool for raising capital for an investment or business. A readvance approval is never guaranteed as it follows the process of a new home loan application. It all depends on your credit rating.

Issuing of Private Shares
Another form of raising capital for an investment is through forming partnerships. When you have a solid investment project idea and not enough funds, it is worth approaching a few private lenders to go into partnership with you. You need to keep the control of the company in mind whilst valuing your shares fairly. Since control is important to you, you may want to get more than 50 percent shareholding to be able to take important decisions in the business independently. You may then sell the remaining 49 percent or less to raise the capital needed to finance the investment.

Issuing shares is not only beneficial in raising the capital, but also as a form of risk sharing. If you keep 51 percent of the shares, you are only facing the same amount of risk from the project. Similarly, your investor(s) are standing to lose 49 percent should things go south. For that same reason it takes a good proposal to get an investor to buy into your idea. You need to prepare a detailed proposal with a clear section on returns on investment. Investors buy returns and nothing else.

If all goes well, you may, at a later stage buy your partners out and go solo. This off course is usually easy as seasoned investors want in and out of the deal as soon as possible. When the returns are great, they will sell to you and move on to the next deal.

Traditional Form of raising Funds
This is how most of us are raising capital for an investment or business. We go to the bank. Well, if it works, there's absolutely nothing wrong with a good old bank home-loan application.

Let me just alert you to the mistakes I have made in this area of my investment life.
  • I got a bond originator and trusted them to know absolutely everything. Even stuff I never told them about myself. The truth is that, you need to strip your wealth life naked for your bank to finance your investment.
  • I filled as few the papers as possible. I am grateful for the technology of scanning and emailing. My application takes the shape of a thousand paged bible. Even the tiny income I make from writing is added in my income folder. All rental contracts and every piece of evidence that I can and do get income from wherever is filed, and added to the nice income spreadsheet and sent to the bank. That and evidence that I own some assets.
  • I took whatever interest rate I was offered as long as it was below prime rate. The interest rate you are quoted initially is negotiable. I now believe that they start with an interest rate much higher than what you deserve to allow some space for negotiations. Adopt a principle of negotiating a rate until you get that satisfying feeling that says you have reached the absolute minimum. With my latest acquisition I got quotes from two banks; I took the lowest rate quote to the higher rate bank; and then that bank's reduced rate to the first bank until I knew I reached the bare minimum.
  • I panicked about the time the transaction is taking. Doing a thorough job securing appropriately priced funding is way better than having the transaction wrapped in a short time.
  • I played myself down like I am not a big or important enough investor. When you recognise your value as an investor, you get respect back from lenders. You are a valuable enough investor to the bank or any lender. Down playing yourself is not going to take you far enough. You are all that. Go get them!

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