Consider investing in property
There are advantages to pay cash for an investment property, but also disadvantages if one ploughs all his capital into one asset, leaving little to invest for emergencies.
Pieter Piek of Just Property Invest suggested in a statement that one should take note of the risk of having no gearing protection on the property if the purchase price drops.
Piek said the advantages of an outright cash purchase is certainly appealing.
“You will not be paying interest on a loan and if you are disciplined, that money can be invested into a tax-free account, and you will own the property outright.
“When investigating the best investment opportunity for cash buyers, I always advise them to consider the advantages of purchasing two units with 50% bonds instead of one with cash,” Piek added.
He illustrated his point with this example: “If you find two properties where you pay R1 million and realise a nett rental of R8 000 on each, you get a nett yield of 9,6%. With a 50% bond on both you are just R2 000 worse off than if you had purchased one unit with cash. But now you have two properties.
“When bonding both properties at 50%, your combined monthly repayments will be approximately R10 000. The rental income of R16 000 delivers you a surplus of R6 000 per month and a return of 7,2% on your initial R1 million investment.
He highlighted the properties’ grow at 8% per year over a five year period. Each property is then worth R1 469 328, which gives you equity of R2 938 656, and the outstanding bond will be R898 024.
Removing this and your initial investment of R1 000 000 leaves you with R1 040 632.
“Had you bought one unit outright, it would also be worth R1 469 328, less your R1 million investment, and you have R469 328. You can get double the return, and this after just five years,” said Piek.
Working the same hypothetical example over ten years, Piek valued the property delivering capital growth of R1 158 924 if you bought it cash.
“If you bonded two properties with 50% home loans, your capital growth would be R3 587 605; minus the initial R1 million investment, and your capital gain is R2 587 605,” added Piek.
“You can more than double your investment using the bank’s money.”
Piek said the illustration made, assumed a flat interest rate for five to ten years, uninterrupted capital growth of 8% per annum, and gross rentals of R9 500 or R10 000 per month for about two 40 m2 units in a secondary area where demand is high.
Piek said capital growth is one’s silent investment partner.
“If you are in a position to use bonds to double your growth, you need to think twice about spending all your cash on one unit.”