Property investment returns

We've had bit of cash that needed to find a home, so over the Christmas break I had a look at our buying a small residential unit in a secure development. I live in Fourways, so targetted the Douglasdale area for my research.

My previous investment properties have largely been bought in crummy areas of Johannesburg at sherrif's auctions but that is a very messy, high risk, high return game and frankly, I'm getting a bit tired of all the hassles that go with those properties. I based my research on what I guess most of you would be thinking of doing, that is, buying through a reputable estate agent in a reasonably good suburb and then paying an estate agent to find a tenant and collect the rental. This is about as different to my other properties as you can get, but it should be fairly clean and hassle free.

First off, I went on to www.privateproperty.co.za an excellent website for property searches. I tabulated the monthly rentals of 1 bed 1 bath, 2 bed 1 bath and 2 bed 2 bath properties in each of various secure estates in the area. Then I went to the "For sale" section and tabulated the asking price of similar properties in the same estates. Where there was direct correlation (i.e rental and selling price for the same specification of property in the same estate) I divided the rental by the asking price. I took the average of the results and found that it consistently came to about 0,85%.

That meant that a property for which the asking price was say, R850 000 would bring in a gross rental of about .85% x R850 000 or R7 225 per month. Progress!

Next calculation was to determine the net rental income so I had to deduct -

Levies (estimated R800), annual maintenance costs (estimated one month's rental), occupancy factor (11 months out of 12) and estate agents' management fees (estimated 10% of 11 months' rental). This gave me a net average monthly rental of R4 613.

Now for the finance. I proposed a deposit of R350 000, leaving a bond of R500 000. If that was repayable over 20 years, then the repayments are about R4 500 per month, the same amount as the net average rental income so we wouldn't have to keep paying in on the bond even from day one. Our return on investment of R350 000 would eventually be 4 613 x 12 = 55 356 divided by R350 000 or 15.8% (before tax) which is pretty good, but the catch is that only the interest portion of the bond payments is tax deductible, so we'd still have to pay tax out of our own pockets (until the escallating rentals solved the problem).

That was the benchmark. Now how to improve the numbers. Well, as investment goes down, so return on investment goes up and also as net average rental goes up, so return on investment goes up.

How to bring down the investment (deposit)? Don't buy until you can get a bargain! If we could buy the R850 000 property for R750 000, we would save R100 000 on our deposit and all else being equal the return would be 55 356 / 250 000 or 22.1%. Much better! Plus we'd have R100 000 to go towards a deposit on another similar property.

How to push up the rental? Forget it, we'd just be playing with numbers. We have to work on averages as this deal is long term.

So there you are. You end up with an asset of R850 000 earning a rental income of R4 613 per month. You want to retire on 46 000 after tax at todays rates? You need 14 of them (I've allowed for your post retirement tax) or twelve million rands worth! But you won't have to find 14 x R250 000 for all those deposits, because as the rentals go up (by 6% or 7% per annum), your earlier investments will start to become cash flow positive and you can plough that cash into your following investments. Of course this will take about 25 to 30 years. If you don't have that long you need to push up the average rental by, for example, collecting your own rent and finding your own tenants and if you did your own maintenance you'd only have to pay for the materials.

 

Should you wish to make an appointment, please feel free to visit Derek's diary and book a time that suits you.

 


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