Worked example by a property advisor

This property evaluation has been issued by a well known estate agent. The agent's advisor holds a direct interest in the property in the area, and is currently selling these assets off. The example given here is based on one of his properties.

The area is an middle to upper class growth area with less crime compared to other areas of the country. The crime rate is still high compared to international standards.


2 bedroom, 1 bathroom, 1 garage town house - Price of property R318,000
   
Payment @ prime (mortgage / house bond) R4,426
Minus rent from Tenant -R2,850
Sub total R1,576.56
Plus levies (i.e. taxes, water, refuge removal taxes) R450
Monthly debt due by investor R2,026
   
Assumed price increase in area of 41.76% R132,796.80
Minus 12 months debt due by investor (12 x R2,036) -R24,318.72
Subtotal R108,478
Minus 10% for maintenance -R10,847.81
Transfer fees (government property taxes) R-22,496
Total return after 12 months R75,134.27
   

After reviewing the above, it certainly looks as if a 23% per year is an excellent investment, and it would be if future performance could be based on past peformance, especailly with the introduction of the new law protecting tenants.

The assumption that the agent has used are:

  1. You will be able to sell the house at the price of 132,796.80, or at 41.76% more.
  2. The agent has omitted the commission in the selling price, which amounts to about R15,000-R30,000 for a house in this price range, depending on the estate agent. This specific agent charges R20,000 commission.
  3. He has used a prime rate which has been set at a lower rate (13%) than it is at the moment (17%), this would increase the Payment on house mortgages by about 25%, or up to R5,532 per month as compared to the R4,426 on the sheet.
  4. An agent fee has not been taken into account for the administration of rental of the property, this is currently 10%.
  5. Increase in levies has not been taken into account.
  6. Maintenance is assumed at 10%, but this entirely depend on your tenant and property.
  7. Insurance has been omitted. The property is covered for anything that may happen to the complex itself, such as fire, flooding and collapse of infrastructure. Personal property is not covered, such as in the case burglary or damages by tenetants or burglars.
  8. It is assumed that you will have a tenant for all 12 months, and that the tenant will pay on time without any trouble, such as illegal occupation.
  9. Growth has been assumed to be 41.35%. This has been flat for various months, and may decrease in future.
  10. The agent bought the property without paying commision himself, so this has not been taken into account.
  11. The agent bought the enitre complex as a complete unit (aproximately 20 property units) and so the price is not reflective of the indivdual properties.

If we recalculate the above figures, and we assume an increase of property prices above inflation of 12% (note that this has been flat in recently).Taxes are due on any profits made on sales of investment assets. These taxes have not been taken into account.

2 bedroom, 1 bathroom, 1 garage town house - Price of property R318,000
   
Payment @ prime (mortgage / house bond) R5,532
Minus rent from Tenant -R2,850
Sub total R2,682
Plus levies (i.e. taxes, water, refuge removal taxes) R450
Monthly debt due by investor R3,132
   
Assumed price increase in area of 12% (above inflation of 10.8%) R38,160
Minus 12 months debt due by investor (12 x R2,036) -R24,318.72
Subtotal -R13,841.28
Minus 10% for maintenance -R10,847.81
Transfer fees (government property taxes) R-22,496
Total return after 12 months -R33,343.81

Minus 10% agent fees for rent administration

 -R3,420
Minus commission of R20,000 to sell property -R20,000
Minus insurance -R6000
Total return before taxes -R62,763
Taxes are payable on the R38,160 capital gain as well as the rental income, these have not been taken into account. The government and Revenue services have access to property ownership information. To maximise tax benefits, it is recomended that a closed corporation be set up. These are, however, subject to higher than normal transfer fees on property transfers. Please refer to an accountant for advice.  
   

So far, for an investor who has invested in Rands has made a loss amounting to almost 20%.

For a foreign investor, the implications are far more severe. There are the bank transfer fees, the exchange rate fees, and of course the devaluation of the currency.

Since the Rand has shown some stability in the past year, we will assume four cases:

1) If you invested after December 2001, and we assume a currency devaluation of 0%, your return, assuming a total cost of 5% in bank fees, exchange rate fees, etc., would amount to a LOSS of 25% in US dollar terms.

2) If you invested before October 2002 and saw a currency strength of 7% due to the weekening of the US dollar after this time, you would have made a LOSS of 23.25% in US dollar terms.

2) If you invested at the best exchange rate (averaged) during the year, the currency has devalued by 8.1% in the past 10 months, your LOSS would amount to 31.075% if the currency remains at it's current level without improvement or further devaluation.

3) If you invested before December 2001, the currency devaluated by 33%, your LOSS would amount to 49.75%.

The future of your investment.

The biggest threats are mentioned in the main report. These include illegal occupation, maintanance costs due to damage caused by the tenant or burglars, political decisions that affect investments, new tax laws, crime, the movement in the currency, the large availability of space to build property in the country, and government moves to make affordable housing available.

The indication is that property prices will come down in the medium to long terms.
The majority of financial experts agree that the currency will continue to devalue at 7% to 12% each year against all other major currencies. Some experts place the Rand at 11.75 to a US dollar at the end of 2003 (Currently trades between 9.75 to 10.50).

Back to main report

 

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