The Wealth Room

One of the questions I get asked on a daily basis is, whether property is a good investment or not. This answer has so many variables, it’s really something you would have to look at on a case for case basis, but let’s look at some guiding principles that can help you make the right choice.

Let’s say you find a house at a MARKET VALUE of R1000 000 and you take out a 90% bond (with a 9% interest rate) on the house, as most banks are not giving a full 100% bond anymore over a period of let’s say 25 years.

First off you are going to have the following costs:

Transfer cost on R1000 000 will cost you about R33 000

Bond Registration cost of R900 000 will cost about R20 000

Let’s look at the future costs of the house: The R900 000 bond over 25 years at an interest rate of 9% will cost you R7552pm and the total interest you would have paid on the house is R1365 830 over the 25 year period.

If you had to sell the house after 25 years with an average growth rate of 5% (expected property growth rate in South Africa according to stats SA, however I believe in some areas you can most definitely get a better return than this, but you will have to do your homework to make sure) the capital growth on the house would be R2400 000. If you had to sell the house you would then have to pay commission on the sale of the house of anything between 5% – 8%, let’s use 5% in this case. R2400 000 x 5% = R120 000 commission.

So in summary the house that has a market Value of R1000 000 you have had the following expenses in order to make a profit:

R1000 000 price of the house

R53 000 price of transfer and bond registration

R1 365 830 in interest you have to pay

R120 000 commission you have to pay

Total cost of the house over 25 years is R2538 830 (excluding maintenance costs).

Future value of the house with a projected 5% growth is R2400 000 – expenses of R2 538 830 you get a negative return of R138 830!

So as you can see if you are wanting to purchase a home with a 90% bond and you are buying the house at market value, it’s not going to be the best form of investment for you.

HOWEVER it would be totally different if you had the following cases:

If you are buying in cash, then you don’t have to pay heavy interest rate costs… so this will give you a bigger chance of making a profit. If you don’t have enough cash just yet, look at setting up a disciplined investment account to start working towards achieving this goal.

You make sure you get at least 20% -40% discount on market value, to absorb some of your costs that buying a house will incur. You make your money when you buy the property and not really when you sell the property, so make sure you buy at the best possible price you can get. Don’t be in a rush and make an emotional choice that you will spend many years repaying.

You rent the house out and get the same rental income or more than what your monthly bond repayment is… this point is very difficult to achieve but it is doable, if you’re willing to deal with tenants. WARNING Tenants can add on extra risk to the property and push up maintenance costs. Just keep in mind that when you’re getting a rental income, you will also have to pay tax on this income, so it will affect the final figure.

Lastly, if you are buying the house as your primary residence as you are not wanting to waist your money on paying off somebody else’s bond. Then you get a R1500 000 Capital Gains Tax rebate when you sell the property. However, if you are going to do this, please make sure that you put down as much cash as possible, and continue to pay off the bond as quickly as you can, but also make sure that when you buy the property you’re getting it at at least 20% below market value to cover some of your costs.

My conclusion is as follows,

Not many people have cash lying around to go and buy a property, and it could take forever to save up the cash to buy the property and by then, the property market could have gone up so high that the savings you have are no longer realistic. So if your income allows you to buy your desired property instead of renting, and it is going to be your primary residence, then you kind of have to take the initial knock on paying the interest that the bank is going to charge you. The bright side of this is that after the 25 years period, you will no longer have to pay rental income and you will own an asset to your name instead of paying off someone else’s asset. Please keep all of your expenses in mind when you look at buying a property, so that you can get the best value for money. Buying a house will be one of the biggest investments most of us will ever make, so you want to try and make as much funds from it from the word go.

However if you are wanting to buy a second property for investment purposes, I would suggest you look long and hard at the figures before you go ahead. Once you have run the numbers, you will be able to see if it’s something wise or not really worth your time in the end. Making money off property is most definitely doable, you just need to make sure you know what you’re doing, as you can you burn your fingers very quickly.