Real Estate Investor Magazine South Africa April 2014 | Page 40

FINANCE

BY KOOS DU TOIT

Financial Perspectives
Should you put down a deposit?

W

hen you acquire an investment property, should you pay a deposit? Of course, a deposit would
reduce the loan amount required from the bank and, as such, the interest payable over the term of
the bond. However, there are other factors to consider, such as the fact that the interest portion of
the bond repayment on a buy-to-let property is tax deductible and that an investor may be able to put any lump
sum available to better use.
Considering all the factors that influence the answer to the question of whether to pay a deposit is far easier when
investors use custom-designed software such as the P3 Property Wealth Manager.
When running the numbers for a R500 000 investment property through the software, we can see that paying a
deposit of R50 000 may not, in fact, be the best option.

FIGURE 1: THE INVESTOR PAYS A R50 000 DEPOSIT

In Fig. 1, the investor pays a deposit of R50 000 and obtains a bond for the
remaining R450 000 of the purchase price, ie 90% gearing. The monthly bond
repayments are R4 195, and along with the other property expenses, bring
the total monthly expenses to R5 525. This results in a R525 monthly shortfall
between the rental income and the total expenses, which the investor would
have to fund out of his/her own pocket for the first year. The shortfall is eliminated
in Year 2, when the rental income covers all the monthly expenses, and thereafter
the property starts generating a monthly profit. The return on investment is an
excellent 106.58% pa just the first year!
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April 2014 SA Real Estate Investor

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