@pinksakinah Thanks for your response, good luck with your property. Hopefully they get on a move on with the Gautrain expansion.
Rental property advice please
- Thread starter paedwards
- Start date
pinksakinah
New member
Grammer is not my strongest.....Apologies in advance 
resjudicata
New member
@paedwards How long have you been absorbing the 2,990 for? If it has been for more or less the full time you have owned the property, you have absorbed approximately 250,000 Rand in losses. Meanwhile the property has increased in value by only R150,000. So you are in the negative to the tune of around R100k. Plus the lost liquidity for what is a large deposit.
Even with the increase in rent, over the next 13 years, you will need to absorb an extra ~R310k in losses, if everything stays the same. Of course you can increase your rent as inflation goes up, but bond, levy etc. will go up as well. Agency might increase their fees too.
Then calculate the opportunity cost of not having that money invested in index funds over the life of the property. Is it really worth it? The property has not appreciated that much in the 6 years you have owned it, which is half the remaining time on the mortgage you have left.
I would say you have to increase your rent to match all of the fees so that you are not absorbing any losses at all. Otherwise, what is the point of owning the property as an investment if you are losing money every month because the losses are greater than the rate of appreciation? By the time it comes to sell, you may barely break even, and then you would be out the 20 years you could have invested that money elsewhere and actually made a profit.
Interest rates on properties in South Africa are often close to double what they are in countries like the US (Currently around 6.875% for a 20-year loan in the US according to Google, whereas prime is 11.75% in SA). This is why I just don't think it makes sense to have investment properties in most places in SA. Maybe in some areas of Cape Town where they appreciate a lot. It needs to be remembered that a lot of the investment advice you read or hear about on Youtube with regards to buying property comes from people in countries where the interest rates on home loans are much lower.
Even with the increase in rent, over the next 13 years, you will need to absorb an extra ~R310k in losses, if everything stays the same. Of course you can increase your rent as inflation goes up, but bond, levy etc. will go up as well. Agency might increase their fees too.
Then calculate the opportunity cost of not having that money invested in index funds over the life of the property. Is it really worth it? The property has not appreciated that much in the 6 years you have owned it, which is half the remaining time on the mortgage you have left.
I would say you have to increase your rent to match all of the fees so that you are not absorbing any losses at all. Otherwise, what is the point of owning the property as an investment if you are losing money every month because the losses are greater than the rate of appreciation? By the time it comes to sell, you may barely break even, and then you would be out the 20 years you could have invested that money elsewhere and actually made a profit.
Interest rates on properties in South Africa are often close to double what they are in countries like the US (Currently around 6.875% for a 20-year loan in the US according to Google, whereas prime is 11.75% in SA). This is why I just don't think it makes sense to have investment properties in most places in SA. Maybe in some areas of Cape Town where they appreciate a lot. It needs to be remembered that a lot of the investment advice you read or hear about on Youtube with regards to buying property comes from people in countries where the interest rates on home loans are much lower.
@resjudicata I don't necessarily disagree with your overall conclusion but there is a mistake in your working. The rental property is cash flow negative, but not necessarily an overall loss. Every month he makes a payment he has more equity in the home, which is a part of his net worth. And the longer into the loan term he is, the more the portion of equity he gets with each payment.
Whether it's still a loss or not depends on the actual numbers. It would take more than head math to be sure, but I would guess it unlikely to be a loss in the long run unless the interest rate is really high over prime, or he missed out details like high maintenance costs (or something devalues the house, but that's hard to predict). As a thumb suck estimate people tend to be net-worth neutral on a home loan for their residence after about 7-8 years, positive after. If it's a rental the point should happen sooner.
Homeloans are also an inflation hedge in the long run. Levy, maintenance, fees, etc, will tend to rise with inflation, however the bond payments will not scale up with inflation (inflation is a factor in determining the prime rate, but it's not a linear relationship. 5% inflation doesn't mean your bond goes up 5%. It's likely eventually his bond payments will decrease even when there's a positive annual inflation rate, just difficult to predict when it will happen), while rent tends to rise at at least the same rate as inflation (assuming no price shocks).
Everything else mentioned, especially about considering opportunity cost, are very important considerations. And an investment being cash flow negative can still be a problem even if overall net-worth is increasing, depending on the situation.
Personal opinion I'm very biased against directly owning property as an investment, unless you have some sort of edge.
/@paedwards
Whether it's still a loss or not depends on the actual numbers. It would take more than head math to be sure, but I would guess it unlikely to be a loss in the long run unless the interest rate is really high over prime, or he missed out details like high maintenance costs (or something devalues the house, but that's hard to predict). As a thumb suck estimate people tend to be net-worth neutral on a home loan for their residence after about 7-8 years, positive after. If it's a rental the point should happen sooner.
Homeloans are also an inflation hedge in the long run. Levy, maintenance, fees, etc, will tend to rise with inflation, however the bond payments will not scale up with inflation (inflation is a factor in determining the prime rate, but it's not a linear relationship. 5% inflation doesn't mean your bond goes up 5%. It's likely eventually his bond payments will decrease even when there's a positive annual inflation rate, just difficult to predict when it will happen), while rent tends to rise at at least the same rate as inflation (assuming no price shocks).
Everything else mentioned, especially about considering opportunity cost, are very important considerations. And an investment being cash flow negative can still be a problem even if overall net-worth is increasing, depending on the situation.
Personal opinion I'm very biased against directly owning property as an investment, unless you have some sort of edge.
/@paedwards
@airel Thanks for your response. Yes, over time, given inflation, the bond repayment will become less and less as our money devalues, and if the rent increases there will be a gradual point of offset where the expenses on the property will be easily covered by the bond and then the bond eventually paid.