Rental Returns (the numbers)

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noob_saibot

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Residential Rental Returns (the numbers)

From the info I got here: http://mybroadband.co.za/vb/showthr...idential-property-rental-questions?p=13841171 (and wanting to keep the threads separate), here are some interesting numbers...

Flat R525000
R5200 rental income
R570 levies/rates + Water is about R250 (included in R5200)
Prepaid power for tenant
5% rental guarantee/ collection
Click to expand...

Some other figures (estimates):

Income tax bracket = 25% of income
Inflation = 6,5%

[Ceteris Paribus]:

Total rent = R62,400
Rent - levies + water = R52,560
Net rental income (25% tax) = R39,420
Annual return on capital(%) = 39,420/525,000 = 7,5085%
Real returns = 1,0085%

This excludes other costs like insurance of the asset.

If insurance of around R500(p/m for building only) is included:

Total rent = R62,400
Rent - levies + water = R46,560
Net rental income (25% tax) = R34,920
Annual return on capital(%) = 39,420/525,000 = 6,65%
Real returns = 0,15%

This definitely seems like returns on residential properties are very low.

Is the asset value of the properties too high or is there a large enough supply that is driving prices down to minimal real returns? (I assume that certain areas will have different situations, but it feels like prices in the "middle-class to wealthier" areas are somewhat over-valued).
 
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You forgot the part where the value of the house goes up with ~inflation. More if you picked the right area.
 
HavocXphere said:
You forgot the part where the value of the house goes up with ~inflation. More if you picked the right area.
Click to expand...

Good point. However, my calculation was based on a single year. Based on that though, because I am including a real return (inflation) I should probably include any unrealized gains as well.

*Edit*: I just tried to run the numbers again, but it seems that annualized returns from the price increase would be off-set by the capital-value increase on the property itself.

So whereas you are gaining R30,000+ on unrealized value, that would be off-set through the annualized calculation where the flat/property would go up by the same amount.
 
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Simplistically, When I review an asset I look at
Cost to acquire it
Cost to maintain it
Cost to dispose it

These costs vs the cash generated from the asset is what drives my decision.

I know there are more complex calculations and factors that I overlook. For me it's a quick back of envelope calculation.
 
HavocXphere said:
You forgot the part where the value of the house goes up with ~inflation. More if you picked the right area.
Click to expand...

The problem with factoring the value into the calculation is that it's value that cannot be banked until the asset is disposed.
 
midnightcaller said:
The problem with factoring the value into the calculation is that it's value that cannot be banked until the asset is disposed.
Click to expand...

Another problem is that there is no gain from it. If it is inflation-adjusted increases, your net real return is still zero from that gain (and you may hit negative upon disposal, through taxes).
 
@noob.... Silly question
Why are you subtracting 6.5% from the annual rate of return to get the real return?
 
OP first things first...a flat is most likely a sectional title property. insurance would be paid by Body corporate and included in levy. Second, levies and rates look a little low. I have a couple of properties in those price range and rates are around R200pm and levy R780 pm. This can vary quite a bit.

Lastly dont buy an rental property cash. Run the ROI numbers purely on the cash deposit you put down -preferably 30-40% or enough to make it cashflow positive from day one.. Borrow the balance and claim the interest against tax.

When you have that figured you are on your way to understanding the investment case.
 
Gosh this is so complicated.
Isn't there a more attractive return with less overhead if one were to buy a property stock on the JSE ?
 
In the above example structural insurance and geyser insurance is included in the levies.
You need to add some maintenance costs and also remember that the rental goes up every year to keep with inflation whereas the loan ammount effectively decreases by inflation. Our interest rates are also very low at the moment my first flat I paid around 22%.

On my first flat I made about 100% capital gain in about 5 years and while I dont expect that sort of gain again I suspect property in SA is still undervalued if you look at the rest of the world.

Then there are some nice tax perks like the Section 13sex deductions you can make if you own more than 5 newly build places and various other tax deductions if you have a clever accountant.

All in all its a nearly impossible thing to calculate if you dont know all the facts which you wont. I am just going with spreading the risk and property is just one of my investments.
 
Beachless said:
In the above example structural insurance and geyser insurance is included in the levies.
You need to add some maintenance costs and also remember that the rental goes up every year to keep with inflation whereas the loan ammount effectively decreases by inflation. Our interest rates are also very low at the moment my first flat I paid around 22%.

On my first flat I made about 100% capital gain in about 5 years and while I dont expect that sort of gain again I suspect property in SA is still undervalued if you look at the rest of the world.

Then there are some nice tax perks like the Section 13sex deductions you can make if you own more than 5 newly build places and various other tax deductions if you have a clever accountant.

All in all its a nearly impossible thing to calculate if you dont know all the facts which you wont. I am just going with spreading the risk and property is just one of my investments.
Click to expand...

Tell me more... :whistle:
 
^^vampire^^ said:
Tell me more... :whistle:
Click to expand...

It sounds way more interesting than it is :)

Essentially if you buy 5 new places from a developer you can write off 50% of the value against your earnings over 10 years. 100% if you are the developer.
 
midnightcaller said:
The problem with factoring the value into the calculation is that it's value that cannot be banked until the asset is disposed.
Click to expand...

Or you refinance it. Like etwylite said, if you buy it cash you're missing out on the tax benefit.
 
noob_saibot said:
From the info I got here: http://mybroadband.co.za/vb/showthr...idential-property-rental-questions?p=13841171 (and wanting to keep the threads separate), here are some interesting numbers...



Some other figures (estimates):

Income tax bracket = 25% of income
Inflation = 6,5%

[Ceteris Paribus]:

Total rent = R62,400
Rent - levies + water = R52,560
Net rental income (25% tax) = R39,420
Annual return on capital(%) = 39,420/525,000 = 7,5085%
Real returns = 1,0085%

This excludes other costs like insurance of the asset.

If insurance of around R500(p/m for building only) is included:

Total rent = R62,400
Rent - levies + water = R46,560
Net rental income (25% tax) = R34,920
Annual return on capital(%) = 39,420/525,000 = 6,65%
Real returns = 0,15%

This definitely seems like returns on residential properties are very low.

Is the asset value of the properties too high or is there a large enough supply that is driving prices down to minimal real returns? (I assume that certain areas will have different situations, but it feels like prices in the "middle-class to wealthier" areas are somewhat over-valued).
Click to expand...

You should be offsetting tax against the expenses. An ideal rental property is actually bonded and paid at the minimal installment to increase the interest expense. This allows maximum expense offset against the income. Same with insurance, levies and any other adhoc or maintenance expense - should all be offset against income.
 
eehellfire said:
You should be offsetting tax against the expenses. An ideal rental property is actually bonded and paid at the minimal installment to increase the interest expense. This allows maximum expense offset against the income. Same with insurance, levies and any other adhoc or maintenance expense - should all be offset against income.
Click to expand...

So based on the above would this be correct
Monthly Rental =
Minimal installment +
Interest expense+
Insurance expense+
Levies+
Maintenance expense+
Some profit
 
eehellfire said:
You should be offsetting tax against the expenses. An ideal rental property is actually bonded and paid at the minimal installment to increase the interest expense. This allows maximum expense offset against the income. Same with insurance, levies and any other adhoc or maintenance expense - should all be offset against income.
Click to expand...

I read this in a newspaper also (recently).

When saying you can "offset it against taxes" are you referring to the situation where you calculate your taxes after expenses (eg R46,560) and then you subtract your total taxes payable by saying:

Tax at 25% of rent = R11,390

Tax payable = tax(above) - all expenses = 11,390 - 9,840 = R1,550

This part isn't quite clear to me, as it seems like you're writing off your expenses twice.
 
noob_saibot said:
I read this in a newspaper also (recently).

When saying you can "offset it against taxes" are you referring to the situation where you calculate your taxes after expenses (eg R46,560) and then you subtract your total taxes payable by saying:

Tax at 25% of rent = R11,390

Tax payable = tax(above) - all expenses = 11,390 - 9,840 = R1,550

This part isn't quite clear to me, as it seems like you're writing off your expenses twice.
Click to expand...

You subtract the expenses from income, and add the amount that remains (if any) to your total income. Pretty simple.
 
Buy-to-let property "investments" are like non-interest bearing savings accounts deposits... only much, much, much worse.
 
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