Buy to Rent
 definitions
When investing in buy to rent properties, there are two terms that are essential to understand. These are Capital Growth and Return on Investment. These are much misrepresented, but once understood make investing in residential buy to rent property an obvious choice for the wise investor.
1.   Capital Growth
The real power of investing in property is found in the capital growth. Ask anybody who sold a good property 5 or 10 years ago and they will probably be embarrassed to tell you how much they sold it for – that’s capital growth!
For example, if you bought a little townhouse in Sandton 10 years ago, you probably paid R250 000 for it and it would be worth a million now. That’s growth of 400% (multiplied 4 times) in ten years. Now consider that you financed it with a 90% bond and your rental covered the bond repayments from the start. You therefore invested 10% of the purchase price (only R 25 000)
Where does that leave you? You invested R 25Â 000 and if you sold it today for R 1Â 000Â 000 (after commissions), that would leave you with a profit of R750Â 000 after ten years.
From an investment of only R 25Â 000, and capital growth of 400% you would have earned R 750 000 over the ten year period!
That’s the power of capital growth with a capital P.
2.   Return on Investment
The next term you will hear often is Return on Investment (ROI). Investors like to work out the initial return on investment, or the return on investment in year one. Property is often misrepresented by well-meaning analysts and economist who often quote this term incorrectly and therefore prevent investors from entering the residential investment market.
When these experts publish their figures of return on investment in an asset class, without fail they make a fatal assumption. They assume that the investor paid cash for his townhouse. Who would pay cash for their buy to let property, when the banks are more than willing to pay for most, if not all, of your purchase price?
Let me show you how to work out your ROI, (the buy to let investor method), when considering an investment in a townhouse.
 I will use an example of a Johannesburg northern suburbs townhouse purchased by one of our  Organic Growth Investor Club members earlier this month (April 2013)
By Definition, return on investment equals  RETURN divided by INVESTMENT, expressed as a percentage.
 
Our investor should be very happy with this one, he can comfortably expect a Return on Investment in excess of 100% in the next twelve months.
I hope that these definitions make sense and help you to find your way through all the jargon, while inspiring you to invest in buy to rent residential property.
Please leave your comments below and share this freely by using the social media widgets. You never know who may benefit!
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Hi there
I keep on reading about using a loan instead of paying cash.
If you use a loan to buy the property, it cost so much more in the end than when you buy cash. You get your rental income and that is no shortfall that you have to pay and it is a return on your money immediately that an investment or saving account can not give you per month.
What am I missing?
Thank you for your comment and question. I am not 100% clear
on your second question but will try to answer you . ( please re-phrase your question if I get it wrong)
Your point is valid if you assume that you are using a loan
to purchase a property to live in yourself. If you do so, then clearly you will
end up paying much more than the purchase price due to interest.
The big HOWEVER is when you buy an investment property, it
doesn’t really matter how much interest you are paying over the years, because its your tenants who are paying, not you.
Let’s assume for simplicity sake, you obtain 100% finance on your property and the tenant’s rental covers your bond repayments plus your rates and levies each month (I have bought many properties this way) Every year the rental increases and you pay the excess cash into the bond, thereby reducing the term of payment significantly.
What happens in this case is that you purchase the property into
your name, you use a loan from the bank to pay for it and the
tenants pay the bank back. You pay nothing at all for the property…it merely is a transfer of wealth over a period of 10 to 15 years when the bond is finally paid off.
Now when you consider that you are buying a property for
ZERO, is it really a problem if it takes a few years to pay itself off?
You are the best Neil in providing free explanations of how the property market works. You have literally stripped all my fears away. Thank you!
Thanks Lerato..that is the very reason for Organic Growth’s existence!!!!
Hi Niel
If I purchase a property with a deposit and the remainder is mortgaged, how do I adjust the calculation – Where do I place the deposit and how do I account for the deposit in the ROI calculation?
Nick
Have a look at the calc above in the article.
“investment” is all the cash you have invested in your property.
i.e. Deposit plus any monthly cash shortfall
Yes Matthys, join the Organic Growth Investment Club.
I seek out deals like through our network of estate agencies in good growth areas and make them available to our club members.
@neilvorster:disqus Thank you very much for this article. I’m tired of people throwing around the terms “capital growth” and “return on investment” to appear smart, but asked to explain, their explanations are weak and misinformed. You’ve really helped me understand this.
A question: I bought a buy to let house a few years ago and was given an interest rate of X. I’ve paid the monthly repayments without fail and was wondering whether I should be trying to contact the bank and ask them to review the interest rate with the hopes of having them reduce it? Do you have any tips for me around this if you don’t mind?
Thank You Christopher
There is no harm in asking your bank and if you have success, please comment here and disclose your bankers. We need to support good service!
You can also ask your bank to increase the term of loan which will have the effect of reducing your monthly payments, but will ultimately cause you to pay more in interest.
Hi Niel,
Thank you – I guess I’ll give them a ring and see if they can lower the interest rate. I have two property, one has a lower interest rate, so I might go from that angle. I do my loans through FNB, so that’s who I’ll be talking to.
If I have success, I will keep you posted here.
hi Neil
I like to enquire from your expertise which one is a beetter investment between a buy-to-let residential property and a hospitality property. Especially focusing on ROI
Thanks
Hi Enoch, a well placed good buy to let townhouse wins over specialised property every time. Eg with Covid the hospitality property market plummeted.
I have fears that the area will change and will be crime ridden. should i let the property go before anything changes?
AS soon as you see a suburb start to deteriorate, I would sell and purchase in an up and coming suburb.