Offer to purchase question

[Tman543]

Hypothetical as this has come up with a friend of mine.

Let's say you inherited 2 million

But you earn a normal salary say R25k to R30k

Would you rather buy 2 x 1 million flats cash

Or would you buy 4 x 1 million flats with a 500k deposit on each

Does the bank allow you to do that since in my mind a salary of 25 to 30 doesn't qualify for a big loan like that really?

How else would you deploy the inherited money if your aim is to increase your cash flow over time (income).

Generally it is not worth it to use your own cash to generate cash flow as the ROI will be low depending on the type of rental.

The best case is to put as little of money down in the investment property and leverage the banks money to generate the cash flow.

The deposit will/should lower the interest rate (less risk for the bank) and thus increase your chances for a positive cash flow.

But all that said, if this was an ideal world, to find a property that generates a positive cash flow is another story, in Cape Town it is like finding a unicorn. not sure on the other cities.

 

[Sinbad]

Generally it is not worth it to use your own cash to generate cash flow as the ROI will be low in the investment depending on the type of rental.

The best case is to put as little of money down in the investment property and leverage the banks money to generate the cash flow.

The deposit will/should lower the interest rate (less risk for the bank) and thus increase your chances for a positive cash flow.

But all that is said, is if this was an ideal world, to find a property that generates a positive cash flow is another story, in Cape Town it is like finding a unicorn. not sure on the other cities

To add, the interest you pay on the loans can be offset against the rental income for tax purposes.

 

[RonSwanson]

Hypothetical as this has come up with a friend of mine.

Let's say you inherited 2 million

But you earn a normal salary say R25k to R30k

Would you rather buy 2 x 1 million flats cash

Or would you buy 4 x 1 million flats with a 500k deposit on each

Does the bank allow you to do that since in my mind a salary of 25 to 30 doesn't qualify for a big loan like that really?

How else would you deploy the inherited money if your aim is to increase your cash flow over time (income).

4x 1 million flats, or even 8x with less deposit. It's called gearing. Do the maths with projections after 10-15 years and you will see why.

 

[Thor]

To add, the interest you pay on the loans can be offset against the rental income for tax purposes.

Interesting, but I suppose they slap it back when you sell or something as you never get a net positive with tax?

 

[Thor]

4x 1 million flats, or even 8x with less deposit. It's called gearing.

but surely the salary will be the limiting factor here as it will be responsible for the bond portion?

My thinking is, 2 paid-off flats are better than 4 flats with a 50% bond as the rental income will mostly go to the bank, taxes, and levies?

but with two paid of flats its just levies and taxes that must come off, rest is profit / income

 

[RonSwanson]

but surely the salary will be the limiting factor here as it will be responsible for the bond portion?

My thinking is, 2 paid-off flats are better than 4 flats with a 50% bond as the rental income will mostly go to the bank, taxes, and levies?

but with two paid of flats its just levies and taxes that must come off, rest is profit / income

The financial institution will look at the balance sheet, not just income & expenses. If the investor has a good track record of regular rental income, it gets added to the income. The only reason that the bank may be reluctant to finance anything over 2 properties would be exposure, but then he can go to another bank.

Do the sums on a spreadsheet, first for two homes, increase to four then six and then eight. In 10-15 years' time his wealth will have increased substantially more on the eight homes than if it were just two, because the assets will have appreciated and the debt substantially reduced. He will also have written off the cost of servicing the bonds against the rental income. The more homes, the more it increases, and he is using other people's money to fund his wealth and spread his risk. Gearing in a nutshell.

 

[GhostSixFour]

but surely the salary will be the limiting factor here as it will be responsible for the bond portion?

My thinking is, 2 paid-off flats are better than 4 flats with a 50% bond as the rental income will mostly go to the bank, taxes, and levies?

but with two paid of flats its just levies and taxes that must come off, rest is profit / income

Keep in mind the transfer fees. Although, on 1 bar you should be good.

Also, not just levies and taxes, what about maintenance and upkeep? What about landlord insurance? What if the tenant damages the place?

 

[Sinbad]

Interesting, but I suppose they slap it back when you sell or something as you never get a net positive with tax?

Capital gains tax, yes. But that's regardless of whether you claimed any relief at all at any point.

 

[TofuMofu]

but surely the salary will be the limiting factor here as it will be responsible for the bond portion?

My thinking is, 2 paid-off flats are better than 4 flats with a 50% bond as the rental income will mostly go to the bank, taxes, and levies?

but with two paid of flats its just levies and taxes that must come off, rest is profit / income

Personally, I would do this. They would be paid off and your profit will be part of your income aka your income goes up. You can then funnel that profit towards an extra flat and try and pay it off as quick as possible. Rinse repeat until you are financially independent.

 

[RonSwanson]

Keep in mind the transfer fees. Although, on 1 bar you should be good.

Also, not just levies and taxes, what about maintenance and upkeep? What about landlord insurance? What if the tenant damages the place?

SARS will take the knock with you, spreading your risk.

 

[RonSwanson]

The financial institution will look at the balance sheet, not just income & expenses. If the investor has a good track record of regular rental income, it gets added to the income. The only reason that the bank may be reluctant to finance anything over 2 properties would be exposure, but then he can go to another bank.

Do the sums on a spreadsheet, first for two homes, increase to four then six and then eight. In 10-15 years' time his wealth will have increased substantially more on the eight homes than if it were just two, because the assets will have appreciated and the debt substantially reduced. He will also have written off the cost of servicing the bonds against the rental income. The more homes, the more it increases, and he is using other people's money to fund his wealth and spread his risk. Gearing in a nutshell.

To illustrate my point: Your friend has R2,000,000 capital to employ. Let's assume an interest rate of 7%, rental at 1% of what the property is worth, maintenance rate of 4% of rental cost, and appreciation of 5% p.a.

If he buys one property for R2,000,000 and rents it out, after 20 years his portfolio looks like this:
Asset value = R5 053 900.39
Net income (over 20 years (before tax)) = R7 618 395.83
Total expenses (over 20 years excluding tax) = R317 433.17
So basically he is up R10 672 296.22 i.e. 5 times his capital employed.

If, however, he buys 8 properties for the same value as the one above, bonds them with a 12% deposit, and rents them out, after 20 years his portfolio looks like this:
Asset value = R40 431 203.13
Net income (over 20 years (before tax)) = R 32 144 190.60
Total expenses (over 20 years excluding tax) = R2 539 465.28
So he is up R 70 575 393.73 i.e. more than 35 times his capital employed.

Note that there are tax advantages which I haven't calculated in the first few years, because he is servicing a bond, the income is less, therefore less tax.

 

[Mike Hoxbig]

Hypothetical as this has come up with a friend of mine.

Let's say you inherited 2 million

But you earn a normal salary say R25k to R30k

Would you rather buy 2 x 1 million flats cash

Or would you buy 4 x 1 million flats with a 500k deposit on each

Does the bank allow you to do that since in my mind a salary of 25 to 30 doesn't qualify for a big loan like that really?

How else would you deploy the inherited money if your aim is to increase your cash flow over time (income).

Buy cash. Use that income to buy another.

There's no better property than a paid off one...

 

[I.am.Sam]

with the 2mil he would probably get 3 1 mil flats with 500k deposit each and can keep the other 500k for lawyers and transfers and any mess ups

even though on a 500k bond his bond should be around 4200 and his rental income should be around 6k-7k depending on area

could be more

but take into account levies

so he can break even without putting any cash of his and after few years be reaping extra income from the flats that can be used to buy more flats

but flats also the problem with flats is the body corporates and people who dont pay levies

he could also get flats where there are new developments and not pay some of the fees

 

[Tman543]

To illustrate my point: Your friend has R2,000,000 capital to employ. Let's assume an interest rate of 7%, rental at 1% of what the property is worth, maintenance rate of 4% of rental cost, and appreciation of 5% p.a.

If he buys one property for R2,000,000 and rents it out, after 20 years his portfolio looks like this:
Asset value = R5 053 900.39
Net income (over 20 years (before tax)) = R7 618 395.83
Total expenses (over 20 years excluding tax) = R317 433.17
So basically he is up R10 672 296.22 i.e. 5 times his capital employed.

If, however, he buys 8 properties for the same value as the one above, bonds them with a 12% deposit, and rents them out, after 20 years his portfolio looks like this:
Asset value = R40 431 203.13
Net income (over 20 years (before tax)) = R 32 144 190.60
Total expenses (over 20 years excluding tax) = R2 539 465.28
So he is up R 70 575 393.73 i.e. more than 35 times his capital employed.

Note that there are tax advantages which I haven't calculated in the first few years, because he is servicing a bond, the income is less, therefore less tax.

Very well presented on what it means to be leveraging the bank's money.

 

[Mike Hoxbig]

To illustrate my point: Your friend has R2,000,000 capital to employ. Let's assume an interest rate of 7%, rental at 1% of what the property is worth, maintenance rate of 4% of rental cost, and appreciation of 5% p.a.

If he buys one property for R2,000,000 and rents it out, after 20 years his portfolio looks like this:
Asset value = R5 053 900.39
Net income (over 20 years (before tax)) = R7 618 395.83
Total expenses (over 20 years excluding tax) = R317 433.17
So basically he is up R10 672 296.22 i.e. 5 times his capital employed.

If, however, he buys 8 properties for the same value as the one above, bonds them with a 12% deposit, and rents them out, after 20 years his portfolio looks like this:
Asset value = R40 431 203.13
Net income (over 20 years (before tax)) = R 32 144 190.60
Total expenses (over 20 years excluding tax) = R2 539 465.28
So he is up R 70 575 393.73 i.e. more than 35 times his capital employed.

Note that there are tax advantages which I haven't calculated in the first few years, because he is servicing a bond, the income is less, therefore less tax.

Does that factor in the interest paid on 8 bonds over 20 years?

 

[RonSwanson]

There's no better property car than a paid off one...

FTFY

Gearing works where the asset appreciates, like property. For things that depreciate, like a motor vehicle, it does not.

Does that factor in the interest paid on 8 bonds over 20 years?

The repayments? Yes, it's included. Do the calculations for yourself if you don't believe me.

 

[VBot]

I submitted loan applications today (wish me luck), but it is touch and go on my salary alone. However, I do have a secure monthly rental income. Will that swing it my way?

 

[Gtx Gaming]

I submitted loan applications today (wish me luck), but it is touch and go on my salary alone. However, I do have a secure monthly rental income. Will that swing it my way?

Banks seems be pretty willing atm, absa just seems be handing out bonds

 

[Erohann]

How does something like this even happen?

Did the conveyancer let you know it was registered and then backtracked or did you misinterpret when they informed you registration was due to take place "today"?

Transfer attorney backtracked. They are useless. Sitting in the dark. Unsure if it relates to the on sale nature, I'm third in the chain. Owner sold on auction to the guy I'm buying from, but it never fully transferred to my seller?

Guessing they jumped the gun expecting success (even the home loan account appeared on my banking later the same day, zero balance) or they are just inept. Google reviews and Hello Peter is negative

 

[zerocool2009]

SARS will take the knock with you, spreading your risk.

So true! Did my taxes.... a nice R120k refund for making “losses”.

Its a nice payday for being a landlord!