Why I first got involved in property investment

by Johannes Maree


Trading Trust

Being an accountant by profession, I always look at investments from a risk / reward point of view - the higher the risk, the higher the return required. Investment 101, not so? Shortly after reading Rich Dad, Poor Dad by Robert Kiyosaki for the first time, I sat down and drew up an Excel spreadsheet with a few basic assumptions, much like the example I will set out below.

The sceptics are quick to point out at that real estate is historically not your best performing asset class, compared to the stock market, for example. Perhaps that is true (the JSE All Share Index showed growth of 10% on average per annum over the past 17 years), if you look at only one piece of the puzzle. If you look at the whole picture, it changes the scenario significantly - why is that? Because when you only look at the underlying asset, instead of the whole transaction, including the financing element, you're missing the bigger picture completely.

Let me ask you this question: Will the bank lend you money to buy shares on the stock market? That's easy - NO, not in a 100 years! Will the bank lend you money to purchase an investment property? Very likely, yes… That further poses the question: What do the banks deem to be the riskier asset class if they're willing to accept the one as loan security and not the other?

The analysis I did is based on a fairly average, run-of-the-mill, rental property over a 20 year period:

DEAL

   

PURCHASE PRICE

700 000

 

INTEREST RATE

10.25%

 

LOAN TO VALUE

80%

 

LOAN PERIOD

20

 
 

PROPERTY PERFORMANCE

   

RENT Y1

6 000

PER MONTH

LEVIES Y1

900

PER MONTH

RATES Y1

500

PER MONTH

MAINTENANCE Y1

100

PER MONTH
 

ECONOMY

   

CAPITAL GROWTH

6%

PER ANNUM

INFLATION

5%

PER ANNUM

RENTAL ESCALATIONS

6%

PER ANNUM
 

OUTCOME - DISCOUNTED TO PRESENT VALUE

 

INVESTMENT:

   

TOTAL CASH OUT

160 912

 
 

RETURNS:

   

TOTAL CASH IN

353 854

 

PROPERTY VALUE
(PAID OFF)

846 115

 

TOTAL RETURN

1 199 969

 
 

RETURN ON CASH

746%

OVER FULL PERIOD

RETURN ON
CASH PER ANNUM

37%

 
All returns were discounted back to the present value using the inflation rate quoted.

An average return on own cash invested of 37% per annum year-on-year over a 20 year period is phenomenal in my book. And in keeping with the risk / reward principal - did the 37% per annum return come at the great risk you would expect for a similar return? NO - the bank was even prepared to share the risk with you… Makes you think.

If you want to check the numbers yourself (Platinum and Platinum Elite Members only) you are more than welcome to request the spreadsheet used to calculate the returns shown above.

In summary, why are the numbers so phenomenal?

  1. You're leveraging off the bank's money

  2. You're getting 2 income streams - rentals and capital growth.

  3. Inflation dilutes the value of your loan over time.

If you're interested in getting your property portfolio up and running, or beefing up your existing one, make contact with services@wealthmastersclub.com ASAP and get the ball rolling. You can also have a look at the current stock available, specifically selected for investment-minded people on https://www.destinataholdings.com/what-we-offer/property-investment/residential-property/

The site has a built-in deal planner, unlike anything you would've seen on the standard property sites out there.

The above should not be construed as financial advice and represent my personal views.




 
      Dhrystone
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