Real Estate Investor Magazine South Africa July 2015

FINANCE Property Wealth Creation How to grow your wealth BY CAROL REYNOLDS M any property investors believe property must be seen primarily as an investment class and hence, the view is that it is better to rent a home and invest in numerous income-generating properties, as opposed to owning a home that is not income-producing. Firstly, let us consider the situation of an average household. The family has saved R1 million to put down as a deposit on a property. They then require a bond of R1.5 million to acquire a solid family home priced at R2.5 million. Their bond repayments are over R15 000 per month and their rates are another R2 500 per month. So their home is costing them R17 500 monthly, without the property generating an income for them. If they chose to rent, they will be able to rent an equivalent home for R13 000 per month. This will result in a saving of R4 500 monthly. In addition, they will then be able to invest their R1 million on income generating properties. It is recommended that purchasing either one property for R1 million cash, to generate a clean rental return; or purchasing two properties valued at R1 million each by gearing each one on a 50% loan-tovalue ratio. Let us consider the first option: remember the lower the purchase price, the higher the yield. So, while a property of R2.5 million will generate a return of about R13 000 per month (6.24% yield), a property priced at R1 million can generate as much as R7 000 or R8 000 22 JULY 2015 SA Real Estate Investor per month (8.4% yield). This means you can rent your home, and invest in cheaper stock, because you will benefit from paying a low rental at the R2.5 million mark, and earning a good yield at the R1 million mark. Conversely, you want to benefit as a tenant from a low yield property, and benefit as an an investor from a high yield property. This way, you score on both ends. To return to our example, you are now renting your home for R13 000 per month. You have invested your cash in an apartment with a good yield and are earning R8 000 monthly. After your rates on your investment property have been deducted, you are clearing R7 000 per month. In addition, you have saved R4 500 monthly because your rent is lower than your bond instalments will have been on your home. Thus, you are earning (saving) R11 500 per month and spending R13 000 on rent – you have almost covered your entire rent and reduced your living costs down to R1 500 per month! “The lower the purchase price, the higher the yield.” The other option is to purchase two properties and gear them. In this case, your asset base has automatically doubled, but you now have bonds. Each property generates a return of R8 000 per month – R7 000 after rates have been paid. Your bond www.reimag.co.za

Real Estate Investor Magazine South Africa July 2015 | Page 24