Residential Property Investment

[Pho3nix]

Hi all,

Company that I'm a partner in is looking to diversify into property.
We found a property @ R6 mil.
Monthly rental income of R112k and Expenses of R31k excluding the bond.

Now the place needs a bit of work. We have about 7% available which we wanted to use for renovations but no idea what the bond will be currently( FNB yet again hasn't gotten back to us )

Some help or guidance with this would be appreciated as we haven't done anything of the sort before.
Might this possibly be a good investment?

Bank apparently will only offer us 10 years to pay everything off and that seems like the bond amount will be ridiculously high when I think about it.
Owner doesn't want to negotiate at the moment. Trying to organize a face-to-face.

Help please.

 

[Alton Turner Blackwood]

Slightly besides the point, but who's standing surety? You guys as employees, or more correctly you as the partners? Which then brings me to another question: What happens to you guys when the company folds or simply cannot afford the monthly payments anymore?

 

[MKFrost]

Link to FNB's bond cost calculator

https://www.fnb.co.za/calculators/homeloan/MonthlyRepayment.html

 

[Pho3nix]

Link to FNB's bond cost calculator

https://www.fnb.co.za/calculators/homeloan/MonthlyRepayment.html

FNB has a differant calculation for residential property vs commercial property.

https://www.fnb.co.za/business-banking/finance/commercial-property-finance/index.html

 

[Pho3nix]

Slightly besides the point, but who's standing surety? You guys as employees, or more correctly you as the partners? Which then brings me to another question: What happens to you guys when the company folds or simply cannot afford the monthly payments anymore?

As partners we are standing surety.
2/3 of the guys will be working on the day to day stuff.
Other income coming in from Web and Manufacturing side will hopefully supplement us should rent not be paid in time etc.

As for if the company folds..Sell?
The income from the property currently covers all the other expenses and has a R43k profit coming off. This won't be used by us. 1/6 will go into a year account which we split annually. The other split for emergencies and some other random stuff.

 

[Alton Turner Blackwood]

As partners we are standing surety.
2/3 of the guys will be working on the day to day stuff.
Other income coming in from Web and Manufacturing side will hopefully supplement us should rent not be paid in time etc.

As for if the company folds..Sell?
The income from the property currently covers all the other expenses and has a R43k profit coming off. This won't be used by us. 1/6 will go into a year account which we split annually. The other split for emergencies and some other random stuff.

OK, but I do however suggest you make 100% of the people you work with.

You also need to remember that once you guys have agreed to the purchase, none of you can pull out. That's right. If you get tired of them after a year and want to move to a different job or whatever, you will still be held as surety.

So if you guys still owe 5million between say 5 of you (assuming you're 5) after two years and you leave. If they fsck things up the bank will come after your personal possessions. Transactions of this nature does not have to follow the NCA, ie, the bank doesn't have to take any reasonable steps to recover the money, they pretty much can do what they want to get their money back.

Don't get me wrong, if you trust and believe in your partners then go for it! I certainly wouldn't take the risk, but that's just me

 

[Pho3nix]

OK, but I do however suggest you make 100% of the people you work with.

You also need to remember that once you guys have agreed to the purchase, none of you can pull out. That's right. If you get tired of them after a year and want to move to a different job or whatever, you will still be held as surety.

So if you guys still owe 5million between say 5 of you (assuming you're 5) after two years and you leave. If they fsck things up the bank will come after your personal possessions. Transactions of this nature does not have to follow the NCA, ie, the bank doesn't have to take any reasonable steps to recover the money, they pretty much can do what they want to get their money back.

Don't get me wrong, if you trust and believe in your partners then go for it! I certainly wouldn't take the risk, but that's just me

Hehe thanks for the detailed feedback. Would the same still hold true regarding me leaving if I sold my stake in the company. It's a PTY limited.. The bond would be to the company right?

As for my partners.. What do they say about money and friends?

Edit: Forgot I'm part of the surety agreement as well. Can this not be removed if I decide to leave the company?

 

[Alton Turner Blackwood]

Hehe thanks for the detailed feedback. Would the same still hold true regarding me leaving if I sold my stake in the company. It's a PTY limited.. The bond would be to the company right?

As for my partners.. What do they say about money and friends?

Edit: Forgot I'm part of the surety agreement as well. Can this not be removed if I decide to leave the company?

No it can't. The only way to get out of being surety is to die or to pay off the bond.

Think of it this way: you are telling the bank that in case the brown stuff hits the fan, that you are guaranteeing them that you will have the money to pay <whatever % surety you agreed to>. This is irrespective of what type of entity it is.

You cannot pass your responsibility/promise onto someone else. That's like impregnating a woman and then saying to the court that you wish to sell fatherhood (analogous to your eg 50% shareholding) to someone else, in an effort to relinquish all responsibility to that child.

God, I hope that makes sense

 

[Verde]

The excel formula for this loan payment is:
=PMT(0.1/12;120;-6000000;0)
0.1 = 10% interest rate
120 = 120 months = 10 years
Result = payment: R79290.44 per month
Of this:
=PPMT(0.1/12;1;120;-6000000;0) = R29290.44 is loan capital repaid in month 1, and the rest is interest.

 

[Verde]

You said:
"Monthly rental income of R112k and Expenses of R31k excluding the bond "
Which implies a profit of R81k
but then:
"The income from the property currently covers all the other expenses and has a R43k profit coming off"

What is the net, R81k or R43k?

If it is R81k then all expenses including interest is covered from day 1 - very good investment based on info given.

I also have serious reservations about signing surety for a co's debts.

 

[Verde]

The only residential property with yields this high that I can think of is a slumlord type setup.

 

[Billy]

With a surety, the bank will go after the easiest partner to get the money from.

Never sign surety unless you are comfortable to carry all the risk.

 

[SauRoNZA]

How would a company getting a bond to afford this kind of thing consider it an investment?

If you had the capital and decided to spend R6 million for an additional income I would understand it but to get a bond to afford it seems utterly counter productive and very risky.

 

[HavocXphere]

OP you are completely and utterly fckin insane. You / partner group want to sign personal surety for 6 million whilst relying on *one* source of income?

If it goes well then you'll benefit decently...if it goes bad then you're sleeping under a bridge...literally. This could totally work (and the return looks very good) but understand that you're playing Russian roulette here...

we haven't done anything of the sort before.

Indeed. Yes the numbers you've got look good...but I don't see any mention of a tenant signing for 10 years (lol) or any thing showing that you've even remotely considered the risks.

I wouldn't touch this with a 10 foot barge pole unless the bank dropped the surety (lol) or there was a signed lease agreement in place...and even then I'd be jittery...if the tenant company folds then your in trouble (one source of revenue as I mentioned above).

 

[dunkyd]

In South Africa ? Now ?

NEVER !!!!!!

 

[Kalle]

Hi all,

Company that I'm a partner in is looking to diversify into property.
We found a property @ R6 mil.
Monthly rental income of R112k and Expenses of R31k excluding the bond.

Now the place needs a bit of work. We have about 7% available which we wanted to use for renovations but no idea what the bond will be currently( FNB yet again hasn't gotten back to us )

Some help or guidance with this would be appreciated as we haven't done anything of the sort before.
Might this possibly be a good investment?

Bank apparently will only offer us 10 years to pay everything off and that seems like the bond amount will be ridiculously high when I think about it.
Owner doesn't want to negotiate at the moment. Trying to organize a face-to-face.

Help please.

1. Diversify into property is very good from my point of view
2. Are you REALLY clued up about the "bit of work" that is required?
You can burn your fingers quite badly if you don't know what you're doing!
3. However the yield seems to good to be true and in my experience you should be VERY careful with this investment, because if it would be a genuine good investment at this kind of return, it would be of the market within hours. Literally!
So with this high yield there must be some huge risk as well.

 

[Pho3nix]

Evening all, read through the posts and shall update tomorrow morning with all the correct figures and numbers.

Thanks to those that have commented so far.

 

[Pho3nix]

The only residential property with yields this high that I can think of is a slumlord type setup.

I did say it needs some work

With a surety, the bank will go after the easiest partner to get the money from.

Never sign surety unless you are comfortable to carry all the risk.

Will keep this in mind..

How would a company getting a bond to afford this kind of thing consider it an investment?

If you had the capital and decided to spend R6 million for an additional income I would understand it but to get a bond to afford it seems utterly counter productive and very risky.

You make a good point.

 

[Pho3nix]

OP you are completely and utterly fckin insane. You / partner group want to sign personal surety for 6 million whilst relying on *one* source of income?

If it goes well then you'll benefit decently...if it goes bad then you're sleeping under a bridge...literally. This could totally work (and the return looks very good) but understand that you're playing Russian roulette here...


Indeed. Yes the numbers you've got look good...but I don't see any mention of a tenant signing for 10 years (lol) or any thing showing that you've even remotely considered the risks.

I wouldn't touch this with a 10 foot barge pole unless the bank dropped the surety (lol) or there was a signed lease agreement in place...and even then I'd be jittery...if the tenant company folds then your in trouble (one source of revenue as I mentioned above).

Something didn't seem right with me and thus why I asked you guys.
You make a good point, just heard 1 tenant has just left and with lease renewals only happening in the next 2 months. A lot more could be leaving.

Partners are convinced that that this will inject a "decent" amount of funds and I'll be honest. There are not alot of places like this. (Not sure if that's a bad thing tbh)

 

[Pho3nix]

1. Diversify into property is very good from my point of view
2. Are you REALLY clued up about the "bit of work" that is required?
You can burn your fingers quite badly if you don't know what you're doing!
3. However the yield seems to good to be true and in my experience you should be VERY careful with this investment, because if it would be a genuine good investment at this kind of return, it would be of the market within hours. Literally!
So with this high yield there must be some huge risk as well.

1. Thanks
2. Reasonably clued up.
3. You make a good point. From my stand point, the purchase price is too high and that's why I'm *assuming* it's still on the market.
4. Worried about the risk.. Not worried to drop my feet into something new but my spidy-sense is tingling and I'm not sure.