Earning an income of 14% on your cash investment (after most costs)
Return:
An income of 14% on property at the time of writing this blog (March 2012) may seem too good to be true. A good return is always possible provided you buy at the right price and that you can get your money out at a later stage. You will find, though, that your annual increase in your property income will be limited to around 7% and not the expected 10% that is the case with many other rental agreements. The capital appreciation on this property will therefore not be that high - in fact it could be between 3% and 7% depending on the prevailing economic conditions at the time of the sale of the property. So a total return on cash over a period of time could be between 17% and 21%. This will of course be higher if you gear the property (in other words, you do not pay the full cash price of the property).
Risk:
So, what are the possible risks? One is of course that you do not get your rental. Another is the management of the property – you may not want to be bothered to arrange for a plumber to go out and to fix the toilet. This is not so much a risk as it is a nuisance. The other risks would be the maintenance of the building. How long before a revamp is required? Who will do this and how will it be managed? Then if you want to sell, how easy is it to sell?
Other property rental returns:
Typical property returns could be about 5-6% on your capital if you pay fully in cash. Then, depending on the area you could get a 10 or 13% return over time on your property. This means that you will see a higher capital growth on the property. It again will depend on where you buy and the price that you buy at. So you could see a return over time of 15 to 19% on your property if you pay cash for the property. A clever investor may not pay for the property in cash in full. Only a part of the property will be paid for in cash - maybe something like 30% and the rest will be repaid out of the proceeds of the rental. When you do a calculation of this return, it will far exceed the original 15 to 19% quoted here as the capital invested will be less than a third of the full capital. The purpose of this blog is not to give a detailed calculation of that. There is software or spreadsheets available to do the calculation.
Typical property returns could be about 5-6% on your capital if you pay fully in cash. Then, depending on the area you could get a 10 or 13% return over time on your property. This means that you will see a higher capital growth on the property. It again will depend on where you buy and the price that you buy at. So you could see a return over time of 15 to 19% on your property if you pay cash for the property. A clever investor may not pay for the property in cash in full. Only a part of the property will be paid for in cash - maybe something like 30% and the rest will be repaid out of the proceeds of the rental. When you do a calculation of this return, it will far exceed the original 15 to 19% quoted here as the capital invested will be less than a third of the full capital. The purpose of this blog is not to give a detailed calculation of that. There is software or spreadsheets available to do the calculation.
So what did I discover?
I have discovered a building that is ideally suited to be converted to sectional title and that will give an above average return for the first few investors. Normally a payment of R10 000 to the attorney plus of course the necessary documentation and approval for the rest of the money if financed is required. Typically banks would look at 20-30% of the purchase price to be provided by the investor. This of course would depend on the financial standing of the individual as well. It could be less than this requirement. Banks also require a repayment over a ten year period where a residential property could be financed over 20 years or more.
Two of the main reasons why this property could give this return is because the previous owners overspend on security and staffing in a bid to increase the rent collection and they did not have a rigid rent collection process in place. One large area of the building is also rented out at a ridiculously low amount per square meter.
How could this benefit you?
If you act quickly and if your offer is accepted, you could benefit from these returns.
What could you pay?
To get a monthly income of R3287, you will need to make an investment of R563 000 with your bank and get 7% interest on that paid monthly.
If you buy a property with a gross income of 5% and you allow 20% for expenses ... you may get away with less, but let us work on 20% of income ... then you need a staggering R986 000 to get the same income of almost R3300 per month. Your income will be R4100 per month with about R813 for expenses to get you to about R3 300 per month.
To get this income at 14% after expenses, you only need a total purchase price on one of the shops of R280 000. If you buy using an agent to do the transaction, you will need to add the sales commission to that price.
The current expense ratio that we use is 34% and it will be explained below.
On this particular unit indicated here, the gross rental is R5000 per month. The tenant has been in the building for years and would like to sign a new three or five year lease. His payment history is 100%.
Estimated expenses is R1713 (34%) leaving you with a nett income of 14%. If you do make use of a managing agent to collect and supervise your unit, your return will still be 12.6% if they take 10% as a fee.
The price at a net income of 8% (before management collection fees) should be in the order of R490 000. That means that you could get this unit for a discount of R210 000. This is a discount of over 40% on what the unit could be selling for. Even at 11% return (before collection fees), this unit should cost you in excess of R350 000. This is still a discount of 20% on that price.
I have discovered a building that is ideally suited to be converted to sectional title and that will give an above average return for the first few investors. Normally a payment of R10 000 to the attorney plus of course the necessary documentation and approval for the rest of the money if financed is required. Typically banks would look at 20-30% of the purchase price to be provided by the investor. This of course would depend on the financial standing of the individual as well. It could be less than this requirement. Banks also require a repayment over a ten year period where a residential property could be financed over 20 years or more.
Two of the main reasons why this property could give this return is because the previous owners overspend on security and staffing in a bid to increase the rent collection and they did not have a rigid rent collection process in place. One large area of the building is also rented out at a ridiculously low amount per square meter.
How could this benefit you?
If you act quickly and if your offer is accepted, you could benefit from these returns.
What could you pay?
To get a monthly income of R3287, you will need to make an investment of R563 000 with your bank and get 7% interest on that paid monthly.
If you buy a property with a gross income of 5% and you allow 20% for expenses ... you may get away with less, but let us work on 20% of income ... then you need a staggering R986 000 to get the same income of almost R3300 per month. Your income will be R4100 per month with about R813 for expenses to get you to about R3 300 per month.
To get this income at 14% after expenses, you only need a total purchase price on one of the shops of R280 000. If you buy using an agent to do the transaction, you will need to add the sales commission to that price.
The current expense ratio that we use is 34% and it will be explained below.
On this particular unit indicated here, the gross rental is R5000 per month. The tenant has been in the building for years and would like to sign a new three or five year lease. His payment history is 100%.
Estimated expenses is R1713 (34%) leaving you with a nett income of 14%. If you do make use of a managing agent to collect and supervise your unit, your return will still be 12.6% if they take 10% as a fee.
The price at a net income of 8% (before management collection fees) should be in the order of R490 000. That means that you could get this unit for a discount of R210 000. This is a discount of over 40% on what the unit could be selling for. Even at 11% return (before collection fees), this unit should cost you in excess of R350 000. This is still a discount of 20% on that price.
What will you pay?
You will pay the deposit of R10 000 on signature of the offer to purchase in the sectional title. You may have to pay up to 30% of the purchase price as your contribution depending on your bank. You have to pay the normal legal and other transfer fees and duty (or VAT) where applicable depending on how you are going to buy.
You will pay the deposit of R10 000 on signature of the offer to purchase in the sectional title. You may have to pay up to 30% of the purchase price as your contribution depending on your bank. You have to pay the normal legal and other transfer fees and duty (or VAT) where applicable depending on how you are going to buy.
Expenses:
The expenses (expressed on a monthly basis):
R20 500
City of Cape Town - Rates - R3 500 (valuation of building: R4,12m)
Cleaner and cleaning - R3 000
Insurance - R2 000
Security - R1 000
Maintenance - R5 000
Management - R5 000
Electricity - common - R1 000
Total: R20 500
Current total rent roll: R65 000 (76% of roll R85 000)
Expenses as percentage of projected roll of R65 000 per month = 32%. A factor of 34% is therefore adequate and will in fact decrease as a percentage if the % recovery goes to 80 or 84% of rent roll.
So what is available for me right now as investor?
Big unit - price R838 000 - current discount - R358 000 - R480 000 .... GONE -
Unit 1&2 - price R493 000 - current discount - R213 000 ... R280 000
Unit 3&4 - price R325 000 - current discount - R145 000 ... R180 000 .... OFFER
Unit 5 - price R414 000 - current discount - R174 000 ... R240 000 ....
Unit 6 - price R590 000 - current discount - R250 000 ... R340 000 ....
Unit 7 price R345 000 - current discount - R145 000 ... R200 000 ....
Unit 8a - price R345 000 - current discount - R145 000 ... R200 000 ....
Unit 8b - price R364 000 - current discount - R154 000 ... R210 000 ....
Top floor - residential units ... not in the market yet.
This is based on net return rate of 8%. Of course if you lock in the low prices, you will get 14% now.
Spreading of risk:
For the first six months after transfer of the units to new owners, the income of all the units will be pooled, expenses deducted and net payment released. This may result in one unit receiving slightly lower return, but everybody will get a return. After six months the individual owners may decide how they want to approach this matter. In this time a management agent will collect and retain 105 of the earnings for his services.
Expected time frames...
This will be communicated to individual investors.
Validity of these prices.
These prices may be adjusted without giving any notice. It will be adjusted on the blog. If an offer to purchase has been signed and accepted and the suspensive conditions fulfilled, the price will stand of course.
NO OFFER FOR ANY PRICE LOWER THAN THOSE LISTED WILL BE ENTERTAINED
Other investment returns?
You could invest in shares, unit trusts and so forth and get a dividend of 2% to 5% again depending on the investment and you could expect a return of 10% - 20% over time. Again the scope of this blog is not to compare the different investments and as such this is a very general view. You need to consult a professional to get the best information about this. The main differences when you compare that to a property investment is that it could be more liquid (i.e. you can sell it faster) provided that you accept the price that is offered and that you cannot gear it (this means that you need to pay the share or the unit in full and you will then get the growth or lack of growth on it).
You could go to your local bank and you will get 5-7% on your funds depending on how and where you invest and you may not get any capital growth on your funds.
YOUR NEXT STEP
If you are interested a payment of R10 000 must go to the trust account of our attorneys which will be provided to interested parties. Only then documentation for the offer to purchase will be provided. If no offer has been received within 36 hours of receipt of documentation, the R10 000 will be refunded.
So where is it?
The property is situated in the Northern Suburbs, Goodwood area
Compiled by Hansie Louw 082 773 4022 on March 15, 2012.
So what could this look like? (why should I invest now?)
The entity that bought the big unit above will receive R1,8m back over a period of 21 years, allowing for two total revamps of their unit in year 11 and year 21, excluding the sale of the unit in year 21. It is based on a 100% loan, increases of 7% per year, a 12% repay rate to the bank and an expense ratio of 34%.
So for an amount of about R60 000, this investor will get back R1,8m. He will need to pay another R33 000 over the first four years to fund the difference between the rent received and the interest rate payable to the bank. If they choose to make a 20% deposit, there will be no cash flow shortfall.
So do your own calculations. Maybe this is for you, maybe it is not.
You could invest in shares, unit trusts and so forth and get a dividend of 2% to 5% again depending on the investment and you could expect a return of 10% - 20% over time. Again the scope of this blog is not to compare the different investments and as such this is a very general view. You need to consult a professional to get the best information about this. The main differences when you compare that to a property investment is that it could be more liquid (i.e. you can sell it faster) provided that you accept the price that is offered and that you cannot gear it (this means that you need to pay the share or the unit in full and you will then get the growth or lack of growth on it).
You could go to your local bank and you will get 5-7% on your funds depending on how and where you invest and you may not get any capital growth on your funds.
YOUR NEXT STEP
If you are interested a payment of R10 000 must go to the trust account of our attorneys which will be provided to interested parties. Only then documentation for the offer to purchase will be provided. If no offer has been received within 36 hours of receipt of documentation, the R10 000 will be refunded.
So where is it?
The property is situated in the Northern Suburbs, Goodwood area
Compiled by Hansie Louw 082 773 4022 on March 15, 2012.
So what could this look like? (why should I invest now?)
The entity that bought the big unit above will receive R1,8m back over a period of 21 years, allowing for two total revamps of their unit in year 11 and year 21, excluding the sale of the unit in year 21. It is based on a 100% loan, increases of 7% per year, a 12% repay rate to the bank and an expense ratio of 34%.
So for an amount of about R60 000, this investor will get back R1,8m. He will need to pay another R33 000 over the first four years to fund the difference between the rent received and the interest rate payable to the bank. If they choose to make a 20% deposit, there will be no cash flow shortfall.
So do your own calculations. Maybe this is for you, maybe it is not.
