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residential property risks

By Neil Vorster 

residential property investment riskIn last week’s blog, I started investigating just how much risk was necessary to start making serious money through property investment. I discussed the capital growth and the numbers.

This week we  will look at a  cash-flow analysis of a real example to make my point clearer. You don’t have to take massive risks to make money in property .

In  July 2013, Organic Growth has sourced a fairly typical investment property in North Riding. The cashflows look something  like this…

you dont have to take risks cashflow

This is a real example and  shows that with a 10% deposit, if you have the skills to manage it yourself, it will break even from the very first month. With annual rental increases of 10% the cashflow looks more attractive every year.

Your primary risk would be the cashflow implications of a tenant not paying his rent or damaging your property—but,  that is what rental deposits and good property management is about.

Although the South African law is heavily weighted towards the tenants’ rights, the landlord is not defenceless. Our experience is that with careful tenant selection and tenant management, these risks are largely mitigated to the extent that they are hardly worth mentioning.

In our credit based consumer environment, tenants are terrified of the future effect on their lifestyle of being “blacklisted”. This is a great motivator, and is an essential element of property management.

Borrowing the money

Banks are in the money and risk business. If anybody knows the risks involved, it would be our national banks.

Since we are asking the “How risky is it?” question. Try buying R 600 000 worth of blue chip shares and then applying to a bank for a loan of 90% of their cost! One day I am going to do that for fun, just to see my banker managers face!  That alone should answer the “how risky is property investment?” question.

We don’t often think of this, but it is clear that banks are happier lending money against the purchase of a little townhouse in North Riding than the purchase of any JSE listed blue chip shares!

Banks will easily lend you 90% (or even 100%) of the price of your property investment, because the saying , “safe as houses” is true when it comes to investment in housing. It doesn’t matter what is happening to the economy, people will have to live somewhere.

Until recently, 100% homeloans  were so common that when the banks put  the squeeze on a few years ago and started limiting bonds to around 70%, the property market was in an outcry and estate agents starved!

The newspapers said the property market was crashing, the bubble was bursting. Through all the fuss the landlord’s smiled, as this banking scenario created an increased demand from tenants unable to purchase their own homes. And we know that increased demand means increased rentals.

Return on investment

I got carried away and nearly forgot to mention the property investors favourite calculation, namely return on investment in year one.

As discussed in detail in an earlier blog, the return on investment in year one of the above mentioned example is approximately R 60 000 divided by R 86 000 expressed as a percentage: namely 75% .

It is no wonder the banks love to lend money to homeowners and buy to let investors. When their debt is covered by property, their money is safe as houses!

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photo credit: Images_of_Money via photopin cc

About the Author Neil Vorster

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

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