Purchase of 3rd Investment Property - Weighing up Options

mehrtens

New member
Dear PFZA Community

(I'm posting under a new/anonymous account to protect privacy)

We have recently committed to purchase a home in ZA, which we will refer to as "Investment Property C". I would like your advice over whether we should sell or hold what I will refer to as "Investment Property A", an apartment in ZA.

Our long term goals are to split our time between Europe and South Africa, hence we have favoured properties as our investments (although better future returns could have probably been generated from ETFs!)

Details of our finances are as follows:

Investment Property A:

(Currently living here)

Purchased in 2018 for R3,000,000.

Remaining bond: R800,000.

Bond repayment is R8000 p/m (bonded at prime less 1.02%, roughy 15 years to go on bond, but we have overpaid into bond here and there. Initial bond amount was R2,250,000)

Current Market Value: R3,400,000.

Last Gross monthly rental was R17,000.

Last Net monthly rental (after levies, rates, elec and water): R13,000

Net cash in from this property: R5,000 (rent monthly less bond)

Investment Property B:

European-locale property

Purchased in 2022 for EUR: 1,300,000

Interest rate: 1.98% (variable rate, but it's a low-risk country)

Remaining bond: EUR 920,000

Bond repayment: Roughly EUR 1650 p/m (interest-only bond, no obligation to repay principal)

Gross monthly rental: EUR 3250

Net monthly rental (after same costs as above): EUR 2,550

Net cash in from this property: EUR 900 (rent monthly less bond)

Investment property C:

(Where we will be moving to for the medium term)

Purchase price R7,300,000

Bond: R4,000,000

Interest repayment: Estimate ~R40,000 p/m

Yes - we realise it's an incredibly privileged position to be in, foreign currency earnings and stonks have helped big time.

We are worried about being too highly geared on financing, giving the above. With both of our salaries and guaranteed employment, we should be OK. However, we are considering the option of selling Investment Property A to clear down the majority of the bond on Property C.

Given the above, how would you approach it, if this was your portfolio?
 
@mehrtens Had a similar position to yours, though properties worth a bit less, ultimately dropped the smaller rental and rolled proceeds into current property.

1) rental is ok as a diversified aspect of a portfolio but it’s somewhat high risk (tenants can damage/stop paying) and relatively low return unless you picked very well, which your numbers suggest you’re getting a low return. One round with bad tenants is pretty sobering.

2) it depends if there’s a practical reason to hold the other property. For example, we kept one rental in a different area because we may want to use it later and it’s our backstop if we were to lose our incomes or have a big setback (could rent out our larger property and go live in the small one).

However:

It depends if your “A” area is soft right now due to rates (ie buyers can’t finance) or in an in demand area where demand is strong, we factored this into timing. It was the right time to unload ours because the market for it was good and there wasn’t a lot of comparable units available, waiting a bit probably brought us 15-20% more in gross price due to our specific circumstances.

Also you will need to carry the rental property costs during the sale and you can expect your tenant may want out, may or may not be cooperative with showings which can slow things down etc.

Would also consider the likely maintenance in the next 5-10 years with property A and factor that into your numbers. We sold a property that was going to need updates worth probably 10% of the value within 5 years (we did not hide this at all during the sale!).

Basically, keep doing all the math and be practical.
 
@mehrtens As an employee, I would be scared being in that much debt. How is your employment guaranteed?

One retrenchment or job loss or (god forbid) one of you passes away and you are up to your eyeballs in debt with no way to repay it.

Looking at the numbers, your gross rental yield on both property A and B are terrible (5% and 2,5%!!). I could not imagine being in such a disgusting amount of debt on property B just to make 900 EUR per month (a net yield of 0,07% btw).

Sell both, pay off property C and invest the rest into the market.
 
@mehrtens As others have mentioned reviewing the gross monthly yields of your investment properties, it appears that the returns are below the typical benchmarks for strong rental investments. Investment Property A has an annualized yield of 6%, which is at the lower end of the acceptable range, while Investment Property B's yield is only 3% annually, falling short of the 5% to 8% range considered good. These figures suggest that the current investments may not be optimal in terms of rental income. It's important to also consider factors like capital appreciation and personal financial objectives, but based on rental yield alone, the performance is not ideal.
 
@mehrtens Sell that first SA property for sure. That's a shocker return wise. You would be better off in a balanced unit trust fund or ETF, and it's certainly better to have less debt on your new property. The other two are homes you intend to live in, so unless you are happy to rent, there is no other option. From an investment point of view, you should have a large % of your assets offshore as you plan to live partly there. Having two properties in SA is not helping that allocation.
 
@mehrtens Speak to an Accountant (CA(SA)/ACCA in South Africa), debt is not the enemy if you use it correctly, they might advise you to start a company and you’ll be better able to protect yourself in the event that something goes wrong, as well as the tax benefits that come with that as well.

Edit: “Whilst there are good ideas in the subreddit, you shouldn’t be making a final decision of this financial magnitude based on what people on the internet are saying without you speaking to experienced professionals. DYOR and take your time”.
 
@mehrtens Nothing added to your question except agree you are highly exposed on debt, but insane to see a R3,4m house is only generating R13k in net rental, you would be better off putting that money in the bank to generate interest income nevermind ETFs at those returns
 
@ocd Didn't even see that, that's a horrible investment. It would be best to sell those investement properties and use it to purchase the new 7,3mil property because of the high interest rates in SA and then investing the rest.
 

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