Let the Buyer Beware when buying property from Developers and Investment Clubs
Don’t be duped. When you find a Buy to Let Property for sale from Property Developers or an Investment Club - Check the facts! It is not good enough to read the glossy advert, and simply assume that all is as it seems.
Last week, in one day, I was double spammed by both a property developer and an investment club. Ordinarily I trash the spam, but this time I read the emails and they made my blood boil.
We love the Buy to Let concept, it is a phenomenal way to grow your wealth. What we really dislike is when people feel the need to falsify information to sell a property.
I called the "investment consultant" to ask for more information about their buy to let properties for sale. I was shocked to find out the actual size of the apartment (Not mentioned on the advertising splurb). When I asked slightly more higher grade questions which any investment advisor should know, like, "How do you calculate the return on investment that you are quoting?". I was told she did not know how and would get back to me - I am still waiting!
Every year new investors get duped again and again.
Being a buy to let investor with more than 30 years property experience and 22 years of skin in the game as an investor, I can immediately see through the smoke and mirrors that property developers often use to market their product.
An experienced property investor will probably not be duped when offered a buy to let property for sale, so they prey on new investors, eager to get into the property game.
Buy to Let Investment - False claims and false advertising
My first impression when looking at their proposals was that the prices were too high, but when I looked to see how they justified the prices and the projected income I could no longer stay silent. I couldn’t believe the levels of deception and false advertising employed.
Their assumptions of market related rentals were generally way too high and their expenses were either way too low or simply left out of their calculations completely.
And to make matters worse property developers quote meaningless and inaccurate return on investment figures.
When I spoke to my business partner, Warren, he too, was aghast and asked to interview me to discuss our main points of contention when faced with acquiring buy to let property for sale, especially from developers and investment clubs.
In this video we attempt to shed light on subject and give you eyes to see through the smoke and mirrors.
For obvious reasons we have not disclosed the names of the developer and investment club, but since the tactics used by these two were universal, we didn't deem it necessary.
Some Youtube comments ...
As an investor it is crucial to do a proper due diligence before spending hundreds of thousands of Rands only to discover the truth when it is too late.
Buy to Let Investment - Market projections
I understand that in property investment everyone has to make projections and assumptions – I do this all the time – but it is essential to start with the correct information and ALL THE INFORMATION.
To be fair, not every property developer employs these tactics, and some have better reputations that others.
My hope is that you will be empowered to establish the truth before you invest and help you to ask the right questions.
To assist you in this endeavor, we have made these 2 investment tools available free of charge.
2 Essential Investment Tools
Download your tools now
1. Checklist of questions to ask before you buy [PDF Download]
2. Investment Calculator [Spreadsheet Download]
For ease of reference here are the basic points discussed in the interview above. This article should be read in conjuction with a previous article where I mentioned 8 reasons why I don't buy brand new off-plan townhouses. [read here]
1. How do I know if the price presented by the property developers is right?
Compare with similar units in the area – see deeds office records (Internet adverts can be misleading)
Look at unit size - they often exclude the size in the marketing brochure. And in an example like this one below from a property developer, does the already small 54sqm include the balcony?
1 bedroom unit should be at least 50 sqm,
2 bed unit should be no less than 60 sqm
Price: Look at rate per sqm – divide the price by the size in sqm.
2. When it says buy to let property for sale priced from , what does that mean?
That is the cheapest unit- and it is usually sold by the time you call
Or the price of a top floor unit - and hence more difficult to rent out.
3. What level is the unit on?
Ground and 1st floor are ok, above that is problematic to rent out
4. What is included in the levy? What levies are payable?
- Complex management
- CSOS levy
- Maintenance Reserve Fund (The maintenance reserve fund must equal the complex’s full year budgeted levy income)
5. Is the stated levy accurate?
I have never seen property developers provide an accurate estimate before! In the case above, I would expect the levies in a 1 bedroom apartment to be around R1000.
Estimates used normally have unrealistic security /maintenance and management costs.
Estimates normally don’t include “maintenance fund” savings – By law this has to be an addition of a minimum of 15% of levy
Compare with similar 2nd hand units in the area.
6. What Rates and taxes are payable?
Rates account is normally included refuse removal– check that both are accounted for.
7. Are the estate agents fees accurate or included?
Normally these are excluded from their calculations – (they assume you are going to look after it yourself)
Sometimes they include a subsidized fee which is not market related.
8. Is the quoted rental accurate?
Be careful as they are trying to paint a pretty picture and often inflate the rentals above market
9. What is this rental subsidy or rental assistance?
They often subsidise the rental by R 1000 or R 2000 for 12 months, to sweeten the deal and because they can’t achieve the above-market rentals they quoted.
10. Monthly shortfall – what is this?
How much cash you are going to have to contribute every month to cover all the costs of bond/levies and fees
When looking at buy to let proeprty for sale, make sure you know their assumptions – IE: rental achieved/agents fees/bond term /interest rate/etc
11. Rental yield – what is this? And what can I expect?
- Gross yield Total rental per year/purchase price. This is a totally irrelevant number because it doesn’t account for expenses and you didn’t invest your own money (you probably borrowed the purchase price).
- Net yield Net annual rental (after all expenses) / purchase price – Note this should be a negative number if there is a monthly shortfall. The table above is a classic example where the net yield should be negative because of the monthly shortfall.
- Return on investment Although they often quote this, they never show how they get to this number. It is a mystery how can it be positive if there is a monthly shortfall?
12. Is it necessary to create a series of trusts and companies to own my property portfolio?
Many clubs hard sell the concept of owning properties in a series of trusts and companies and then offer [for a monthly fee of course] to manage them for you.
In my experience it is not necessary to use a trust or company to own your investment properties until your portfolio reaches about 5 or 6 properties.
You will notice how many of the marketing brochures contain calculations based on 100% bond finance. In reality the banks only provide 80% bond finance for properties held in trusts or companies and require you to sign personal surety.
Sometimes they recommend that you own in a company for tax purposes and place the company share in a trust. [The tax rate in a company is 28% and in a trust it is 45% ] -
I believe a structure like that is altogether too complicated and expensive to run!
I personally own some properties in a trust and have not paid tax in the trust for more than 2 decades! I simply make sure the trust does not make any profit.
13. What about 99 Year Leases? Are they the same as a normal sectional title purchase?
We have seen a resurgence of 99 year leases especially in Waterfall Midrand. I chatted to our property specialist attorney recently and this is what he had to say
Gerhard Faurie- Property Attorney
The leasehold model is the one that reared it’s head again in the estates around mall of Africa and was a pre-apartheid mechanism deployed to give non white people property ownership in a time when traditional ownership was not possible
He agreed that you need to be especially careful when entering in a 99 year lease. My advice is contact him at Faurie Nel Inc before you sign on the dotted line.
I say "be careful" because in none of the Waterfall developments that I have viewed do they mention anywhere in their sales literature or brochures that they are selling a 99 year lease. Only by asking the question directly will you be informed that you are paying upfront for a 99 year lease. You will never own the property!
For my personal opinion on 99 year Leasehold, watch these two Youtube Shorts (60 second videos).
And Finally ...
Imagine my face when the marketing email that expects me to spend hundreds of thousands on buy to let property for sale by them, finished with these words:
Don't Be Duped Again
Buy Good Second Hand Properties.
Before You Buy:
Frequently Asked Questions:
What is a good return on a buy-to-let property?
What is a good return on investment (ROI) for property? -
That is the million dollar question!
But before you can answer that question you need to clarify what it means.
Return on investment means "how much value/income did I achieve over a defined period and at what cost"
That is you divide the value/income per year (if you are looking for an annual return) by the amount invested to obtain a percentage.
Property has a few factors to consider when working out ROI.
- Are you going to add capital growth to the net rental income?
- Are you going to assume that you paid cash for the property or that you used other people's money (bank loan).
- do you do a 1 year ROI, a 10 year ROI or a twenty year ROI?
Clearly these factors alter things dramatically.
The economists who are funded by insurance companies like to do annual ROI, exclude capital growth and assume you paid cash for the property. This has the effect of showing poor return on investment for property in an effort to sway you into spending your money on their stock market based investment products.
Developers on the other hand like to use rental return (nett or gross rental return - see the article above for the definitions)
To answer your original question I think an infinite return on investment is not only awesome but possible with property investment.
IE: You use no money of your own, you invest only the bank's money, and use the rental income to pay it off.
When you do this your return (The capital + rental income after expenses divided by Zero = infinite return on investment).
For a full account of how I did this watch this short video below
Can you live off buy-to-let?
YES, absolutely, that is the goal of the exercise.
The goal of the exercise is to acquire a portfolio of good buy to let investment properties, that you paid the right price for, that were located in growing areas etc and you gave the portfolio time to mature (The portfolio matures when the bonds are all paid off. )
Learn how to do it here [Show me how]
How do I find good Buy-to-let property for sale in South Africa
Robert Kiyosaki recommends that you physically look at between 30 and 50 properties before you buy your first property.
Unfortunately it takes about 4 hours per property
- To find a good looking property online - 1 hour
- Make an appointment to view - 30 minutes
- Finally view it - 2.5 hours
So that equates to around 200 hours of property viewing before you buy!
Fortunately we have a solution,
Join our investment club, arrange for a coaching appointment with Neil and we will use our experienced team to source great 2nd hand properties for you that pass our stringent investment tests.
We call this property in a box.
More information on this unique method of buying property [here]