Real estate investment calculation - are the numbers right?

[Basment Dweller]

I'm just playing around with a hypothetical investment here:

I purchase a 1 million rand House

- I pay a 20% cash deposit of R200 000
- The bank finances the remaining 80% at a fixed interes rate of 9% which amounts to R6000/month (800000 x .09 / 12)
- Capital repaiment is over 20 years = R3333/month (R80000/20/12)
- total Bond repayment = R9333/ month

- Rental income is R12 000/month
- I deduct 5% for repairs and 5% for vacancies monthly
- From the R10800 remaining income I deduct rates and taxes of R400/month and insurance of R300/month = R10100
- I then deduct the bond payment of R9333 from R10100

This investment is making a net profit of R767/month off a cash investment of R200 000, return is 4.6%. Am I better off investing in a REIT and not worry about the hassles of managing tenants? Do the numbers make sense?

[Houses4Rent]

Maybe a bit optimistic as I cannot see that you can fix your bond at 9% right now and then for 20y at that rate. Interest will unlikely go down from now, just up. So make provision for that an rather work on at least prime plus 2%. The unexpected increase in interest rate has killed many investors in the past for cash flow constraints. If you are self employed the bank will not fall over themselves to give you a bond either. Use a good bond originator.

Your instalment rate is wrong I am afraid as its not a linear function. At the beginning its almost all interest and in the end almost all capital repayment. Its easier to use an online bond calculator to work out your monthly instalment. I have a little spreadsheet and it spits out R7197.81. Excel can do that easily for you (PMT formula). So here is now even more profit for you.

5% for vacancy is a bit low. Just one month vacancy in a year is already 8.3%. And you might have to cover that amount in the first month after transfer, so look at your cash flow projections. The way you worked it out you would only have that 5% reserve built up after one year. Same for maintenance.

I am thrilled that you work out your ROI on the cash outlay and not on the purchase price which is what many people get wrong.

Don't forget the transfer duty and transfer costs and bond registration costs in your cash flow projections and ROI calculations. Since they are once off expenses I tend to exclude them for ROI for simplicity, but of course you need to have the funds upfront over and above the R200 000 deposit.

If its in an estate or flat you have to allow for levies too.

Park your reserves into the ACCESS bond and save you a whack over time.

Where can you buy for R1.0 Mio and get R12000 rent? That is outstanding. One is very lucky if one gets 1% rent on purchase price.

[Basment Dweller]

This is great feedback thanks H4R...

It's just hypothetical, I'm just trying to see if property investments make money at the end of the day....1mill rand property wont bring in a 12k rent, more like 8-9k...but the '1% rule' states that you shouldn't invest unless you're getting no less than 1% rent on the purchase price...

I'll try rehash this calculation based on your input and see what comes out the other end...

[Beancounter]

Remember that interest on a bond is compound. That means that as the capital balance of the debt decreases, so does the interest you pay. If you are lucky enough to get a 9% interest rate fixed for 20 years, the interest per month will be an average of R3864. You cannot deduct the capital portion from your rental income for the purpose of calculating net profit as the capital portion is part of your investment, not your expenses. If you are even luckier to get R12k per month in rental income, I calculate that you will average a rental profit before tax of R6400 per month (if everything remains static an never increases or decreases). Also bear in mind that your capital investment will supposedly grow if property prices escalate more than the inflation rate. Apart from the hassle of tenants, not a bad investment.

If you want hassle-free investments, put your money in government bonds, they render 8% per annum. And don't fret at the word "government". If government fails, so do all other banks and investment institutions.

[Houses4Rent]

If you are lucky enough to get a 9% interest rate fixed for 20 years,

No bank will fix for 20 years in my view, maybe in Europe only.

[Houses4Rent]

If government fails, so do all other banks and investment institutions.

Property will survive such events easily. The minute you rely on government, investment institutions or others in general you are doomed. More and more pension schemes fail. The only person who has your best interest at heart is yourself.

[Justloadit]

Property will survive such events easily. The minute you rely on government, investment institutions or others in general you are doomed. More and more pension schemes fail. The only person who has your best interest at heart is yourself.

Not always so, especially in Africa, and I note here in the last say 30 odd years, Angola, Mozambique, Zimbabwe, and currently the sentiment in RSA with the idea of land grabs.

[Basment Dweller]

If you want hassle-free investments, put your money in government bonds, they render 8% per annum. And don't fret at the word "government". If government fails, so do all other banks and investment institutions.

I've also considered this as owning real estate can be a hassle but there are some nice upsides when owning a real estate business:

Pay for things with pre tax money

This for me is the key difference between making money as a salaried employe and making money as a business owner. If you buy shares, you have less hassles but also less business benefits.

Real estate management is also fun if you're a hands on type guy. I've built kitchens, installed garage doors, done painting etc etc.

After a while you build up a team of people that can do renovations and allow you to buy and flip housing...

Even further down the line you could be in a position to build your own houses and sell them and that's where the big money comes into play...

[HR Solutions]

I also have property which I rent out. The extra money I put into the bond. To me this is a better investment.

[Houses4Rent]

Not always so, especially in Africa, and I note here in the last say 30 odd years, Angola, Mozambique, Zimbabwe, and currently the sentiment in RSA with the idea of land grabs.

I cannot exclude that chance, but I am sure my urban properties owned in a trust are not the easiest targets for a land grab.