Real Estate Investor Magazine South Africa April 2014 | Page 42

FINANCE
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However, in Fig. 2, the investor
pays no deposit and obtains a
100% bond, ie 100% gearing.
The monthly bond repayments
are slightly higher at R4 661, and
along with the other property
expenses, bring the total
monthly expenses to R5 991. This
results in a R991 monthly shortfall
between the rental income and
the total expenses for the first
year. The shortfall is eliminated in
Year 3, when the property starts
generating a monthly profit. But
the return on investment is a
whopping 504.72% pa just the
first year!
So while paying a deposit will
result in a slightly lower monthly
shortfall and a shorter breakeven
period, not paying a deposit – or
gearing the investment 100% makes a massive difference to the
return on investment.
Another alternative
Perhaps a better option for an
investor with a R50 000 deposit
would be to split this deposit into
two deposits of R25 000 on two
R500 000 properties.

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As can be seen in Fig. 3, a R25 000 deposit would result in a monthly bond repayment of R4 428 per month, bringing
the total monthly expenses to R5 758 and resulting in a R758 shortfall per month in the first year and R369 in the
second year. On both properties, the total shortfall will therefore be R1 516 per month in the first year and just
R738 per month in the second year. Thereafter, the properties will start generating a monthly profit. In 20 years’ time,
when the bonds are paid off, based on a 12% capital appreciation, the investors will own two properties worth R4.8
million each (or R9.6 million in total) and each generating a month income of R30 000 each (or R60 000 in total). At
this time, the return on investment would have reached a staggering 771% pa on each property.
But, again, without any deposit, ie if the properties are acquired with 100% loan (gearing), the return on
investment on each of the properties would be a mind-blowing 1 391.75% pa.

With purpose-designed software such as the P3 Property Wealth Manager it is easy to determine the impact
of paying a deposit on your investment. Download the demo version of the P3 Property Wealth Manager
software free of charge from www.hope.co.za and determine for yourself the effect of paying a deposit on your
return on investment.
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April 2014 SA Real Estate Investor

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