@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.
@resjudicata Thank you so much. This is the sort of response I need. I haven't actually keep track of the losses/expenses, but it has become more evident now with the interest rates increasing. For about two years the rent on the property was paying for the property, I was breaking even, and one year I had to pay SARS about R12000 because I had made a profit (this was because of COVID and the significant drop in the interest rate). If I can rent the property now for R14500 I will make a loss of R990 per month for the moment. If the interest rates go down then that amount will decrease.
I think the main consideration is, if I had put down a 10% deposit at the time of purchase I would definitely have sold the property. Because I didn't the temptation has been to rent it and this has worked, but it means there is liquidity in the property which I could put in my current home loan, decrease that significantly and then stick the money I save there into the S&P for example. In 13 years would I be better off is the question. I'm going to do more maths now.
Thanks again for your response.
I think the main consideration is, if I had put down a 10% deposit at the time of purchase I would definitely have sold the property. Because I didn't the temptation has been to rent it and this has worked, but it means there is liquidity in the property which I could put in my current home loan, decrease that significantly and then stick the money I save there into the S&P for example. In 13 years would I be better off is the question. I'm going to do more maths now.
Thanks again for your response.
nowfaith2012
New member
@paedwards Push up the rent to at least R15k - R17500
Could have a look at recent property sales in the area to get an idea on the offer you could expect on the property
Could reinvest or pay off the property you have in Johannesburg
In general the most profitable property to rent out is smaller studios or 1 bedrooms
You could purchase 2x, 1 bedrooms and then you have diversified and have a lot less risk of having 2 vacant property’s
There is also great funds like Denker
Where you essentially own a persetage of a portfolio of property investments
You seem to have purchased originally to live in the PTA property and not as a passive income
Could have a look at recent property sales in the area to get an idea on the offer you could expect on the property
Could reinvest or pay off the property you have in Johannesburg
In general the most profitable property to rent out is smaller studios or 1 bedrooms
You could purchase 2x, 1 bedrooms and then you have diversified and have a lot less risk of having 2 vacant property’s
There is also great funds like Denker
Where you essentially own a persetage of a portfolio of property investments
You seem to have purchased originally to live in the PTA property and not as a passive income
@nowfaith2012 Thanks for your response, if I sold the property I can't imagine I would buy more property. More than likely I would put the equity in my current loan and then stick the monthly savings derived from that into the S&P.
nowfaith2012
New member
@paedwards https://www.denkercapital.com/funds/
This is the alternative fund I mentioned
Basically a massive portfolio of property investments
This is the alternative fund I mentioned
Basically a massive portfolio of property investments
@nowfaith2012 Thanks, I had a look at their website.
holysocks46
New member
@paedwards The R600k you had placed you into this fortunate position. If you take all factors into account you will not be able to afford that house exactly as it is now with only R600k. Because it is R1,8k now R600k adjusted for current inflation, latest building costs etc etc. It seems you bought wisely in a boomed off area, so I would not touch it. This "tree" will only give "shade" much later. Hang in there, unless the neighbourhood goes to shit, you will be Ok. Change tenants regularly untill you break even, then try to find good long term tenants. Good luck.
@holysocks46 Thanks for your response, that is a useful way to think about the situation.