How the bank enslaved my client in a Debt Trap
I have a client with a property portfolio of just short of R500m. He has been enslaved by his bank and SARS. Here’s how –
Government departments only want to rent property from black owned enterprises, so, in the early days, my client was able to buy commercial properties from white owners, negotiate 10 year leases with Government departments and then take those leases to his bank for finance.
The bank would then discount the future rental income to present day values and grant a facility for that amount of money. So initially the money received from the bank exceeded the amount paid for the properties and the business was cash flush. Money could then be spent on improving the properties and enjoying this new found wealth.
With the passage of time, the interest portion of the bond repayments diminished, so the tax burden rose (see my article “Property Investors Beware“). In his case, however, the annual rental increases were not available to pay the taxes because they had already been factored into the bonds.
My client got further and further behind on his tax payments and found it increasingly difficult to keep SARS quiet and to service the bonds.
Off to the bank for “help”. The bank lent him more money at more punitive rates and he gained temporary relief.
But the squeeze got worse, and worse, and worse. always with the bank “helping out”.
Now let’s stand back and see what has happened.
1) The bank effectively has a property portfolio of just short of R500m.
2) The portfolio is managed by my hapless client on their behalf. He maintains the properties, collects the rent and the hands most of it over to the bank (where they call it interest).
3) SARS keeps him alive by deferring tax payments and issuing Tax Clearance Certificates so that he can continue to collect rent and pay some of it over to SARS (they call it Income Tax and VAT).
4) At the end of the day, the bank will probably foreclose on my client, acquire title to the properties and then sell them to their next “property manager”, starting the cycle all over again.
So, when you bond your investment property, recognise this for what it is. As long as you don’t overgear and don’t forget that SARS wants their cut, you’ll be OK.