These two questions can either cost or earn you millions!

By Neil Vorster | 2 Property Investment Planning

By: Neil Vorster
investment adviser

Here are two questions, one for your financial advisor / investment advisor and one for your investment savvy estate agent.

May the best man(or woman) win.

Question 1

Dear Financial Advisor, if I have R 200 000 in cash, how many Rand’s worth of shares can I buy?

Your question will probably be met with incredulous silence. The answer is obvious, exactly R200 000 worth.

If you  have a very healthy balance sheet,  you may be able to borrow  up to 50% if you buy blue chip shares enabling you to  purchase R400 000 worth. By their very nature, blue chip sharesoffer the owner relatively secure and safe growth, and therefore offer very low dividend yields. You will be left having to finance the cost of your borrowings and will no doubt justify this “forced savings” to yourself as the wise decision which provides gearing of your investment for the benefit of growth.

So the simple answer is, 9 times out of ten, your R 200 000 will buy you exactly R 200 000 worth of shares.

Banks understand RISK!

The fact that the bank is not really willing to lend you money to buy even blue chip shares makes you wonder about the risks involved …!

 Question 2

Dear Estate Agent , if I have R 200 000 in cash, how many Rands worth  of property can I buy?

If he knows anything about buy to let investment, he will likely be a property investment coach, and his answer will be something like this. “About R1 000 000 worth should be relatively easy”.

Even though the banking world has been all gloom and doom since 2007 when the credit crunch bit, today there are any number of banks willing to lend up to 100% of the purchase price on well-located property  purchases –  a 90% loan is more likely, so we will work on that for now.

Buy to let property investment relies on two primary factors, namely future capital growth prospects and rental cashflow.  The R 1000 000 solution is more likely to comprise 2 small Johannesburg northern suburb townhouses of R 500 000 each.

Let’s assume round numbers, and a steady interest rate, so that we avoid the paralysis of analysis and miss the whole point.

Each of your two property investments will look something like this:

Using  R 100 000 for each of your properties, as follows. . .

Purchase price:      R 500 000

Homeloan:             R 450 000 (bond repayment R 4000 )

Deposit:                 R  50 000

Transfer costs:      R  25 000

And you have a cash surplus of R 25 000 to store in your access bond (to mitigate your landlord risks)

Your rental income should be about R5000 per month, less levies and rates of about R1000, leaving you with a monthly net rental income of R4000 towards meeting your bond repayments. With a bond repayment of  R4000 per month, you would be breaking even every month on your investment in the first year.

The two factors which make property investment fantastic are the exponential income growth plus capital growth

Rental growth:  Your rental of R5000 should grow at, say 8% per year, that is by R400 after one year. Simultaneously your R1000 levy costs will also increase by 8%, or R80. So your net rental income will increase by R320 in year two. That is net rental income growth from R zero per month in year one to R 320 per month in the second year.

Capital Growth : Using the simplistic 10% number again (it isn’t that far out – it’s a bit low if you are considering the last 12 years, and a bit high if you are considering the last 4 years)

Your property will have increased in value by  R 50 000 after 1 year of ownership .

So doubling up the numbers – remember we are buying two townhouses of R 500 000 each.

For R 200 000, you can buy R1 000 000 worth of property, offering you a net rental income of  R zero in the first year.

PLUS

R 100 000 in capital growth after year 1 – that is a 50% return on your R 200 000 invested. (You have R 1 000 000 of property growing for an investment of a mere R 200 000!)

In year two you can start to add the rental growth….

Banks understand RISK!

The fact that the bank is willing to lend you 90% of your purchase price on a property purchase makes you wonder about the risks involved.

What would you do with your R 200 000 in cash?

Who is going to earn his commission, the savvy estate agent or the investment advisor?

Please share, comment and question freely below.

 

 

Image courtesy of [creativedoxphoto] / FreeDigitalPhotos.net

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About the Author

Neil Vorster is a property investment coach, investment author and co-founder of Organic Growth. Aerobatics pilot and cycling nut.

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