And since what you really want to know is what returns you generated on the money you invested , you can start using formulas such as Leveraged Internal Rate of Return ( IRR ) to calculate your returns . This enables you to compare apples with apples : The wealth created from your property portfolio vs The wealth you would have generated if you put that cash into another asset class or investment .
I have another way of looking at property investment : 1 . Firstly , I look at my cost of capital or financing ( in finance terms , this is called the Weighted Average Cost of Capital or WACC )
2 . Secondly , I look at the return a property investment can generate ( from the capital appreciation and net rental yield ), and
3 . Finally , I see if that return beats the cost of capital or financing .
So , which way is better ? To pay off your property portfolio or leverage or refinance it ?
Your decision will depend on your ability to take on risk and your risk appetite ! It is as good as asking which of these two you prefer : Paid off properties worth R10 million or Properties worth R100 million with R70 million debt ? Of course , there is no right or wrong answer . Although there is more equity ( net worth ) in the R100 million portfolio , there is also more risk ( more debt = more risk ).
“ As long as the return a property generates is more than the cost of financing , it makes sense for me to own as many such properties as possible . This is the leveraged approach to investing in property .”
SA Real Estate Investor Magazine NOV 2022 47