Real Estate Investor Magazine South Africa May 2014 | Page 32

SMART MOVES

Buy-to-let
O

BY KOOS DU TOIT

Why it is so superior to other property purchase options

ne of the most compelling reasons why
buy-to-let property investment is superior
to other investment alternatives is the low
out-of-pocket investment required, compared to
other investments.
For example, if an investor wants to acquire
R600 000 worth of shares, he/she would need
R600 000 in cash to invest. But, if an investor acquired
an income-generating, capital-appreciating property
worth R600 000, the out-of-pocket investment
could be just R32 000. A real life example of a buyto-let property in a newly completed development in
Limpopo illustrates how this is possible.

By the end of the fourth year, break even point is
reached and the rental exceeds the monthly expenses,
so the investor no longer has to pay money into this
investment property. In fact, in Year 5, the property
starts generating a monthly profit of R383, and this
increases year after year as the rental increases.
And how much money did the investor have to pay
out of his/her pocket for this income producing asset?
Just R32 511. If all the profits (rental income less
expenses) are reinvested back into bond after break even
(end of Year 4), this property will be paid off in less than
12 years without the investor spending another cent of
his/her own money!

During these 12 years, there will be maintenance
and repairs that need to be done. Interest rates may rise
Entering these variables into the custom-designed P3 (and fall). There may be more (or fewer) vacancies than
Property Wealth Manager software shows that the shortfall allowed for. Just to be on the side of caution, let’s say the
- the difference between the rental income and the monthly investor spends another R18 000 over the 12 years to
expenses - is R1 250 per month in the first year, R888 per cover these contingencies. This means that the investor
month in the second year, R497 in the third year and just paid about R50 000 out of his/her pocket to acquire a
R74 in the fourth year. This shortfall decreases each year as R599 000 property which - 12 years later - is worth
the rental escalates by 8% per year, but the biggest expense R1 800 000 and generating a monthly rental income of
– the bond repayments – remain static.
R14 000 per month.
The return on this R50 000 out-ofPURCHASE PRICE
R599 000
pocket investment is truly spectacular
DEPOSIT
Nil
when compared to those produced by
COSTS (TRANSFER DUTY, BOND COSTS, ETC.)
Included (new development)
other asset classes. There simply is no
MORTGAGE BOND (INTEREST OVER 20
10%
other investment that can be acquired
YEARS)
in this way or that generates the return
CAPITAL GROWTH
10%
on investment that buy-to-let property
(conservative estimate given real growth in area)
does.
RENTAL INCOME
R6 000 (based on current leases for units in the
These calculations are made simple
development concluded with corporates such as Eskom) by the P3 Property Wealth Manager,
RENTAL ESCALATION
8% (as per current lease
c u s t o m- d e s i g n e d f o r p r o p e r t y
agreements on units in the development)
investors. We invite you to verify the
VACANCY RATE
5% (ie provision for 1 month vacancy in every
accuracy of these numbers for yourself
20 months, given long-term leases with corporates)
by downloading the demo model of the
MONTHLY RATES AND TAXES
R190
P3 Property Wealth Manager, free of
MONTHLY SECTIONAL TITLE LEVY
R500
charge, at www.hope.co.za.

Investment numbers

MONTHLY RENTAL MANAGEMENT FEE

R480

MAINTENANCE ALLOWANCE (FIRST YEAR)

Nil (brand new unit)

INFLATION

8% (rate at which levies, rates and taxes, and
other costs increase every year)

30

May 2014 SA Real Estate Investor

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RESOURCES
P3
www.reimag.co.za