The last house I’ll ever own…

Mogadishu

Luxury accomodation on the warm indian ocean, going so cheaply you wouldn’t believe it. Come view now… in Mogadishu!

I’ve written before about how I’m really not a fan of a buy to let property as an investment, but what about a buy to live in property? Luckily for you, I’ve done that before too. In the last property article I mentioned the house with a built-in hole in the back yard for pouring cash into. Well now having just sold the property I can provide some real numbers to answer that question.

The numbers:

Purchase date: 2010-02-19
Purchase price: R1 260 000
Selling date: 2015-02-19
Date of transfer (estimated): 2015-05-01
Selling price: R1 320 000
Total profit on sale: R60 000
Less Transfer costs on purchase: R34 000
Less bond cancellation fee: R3 000
Less agents commission @ 5%+VAT: R75 240
Less maintenance on the property over 5 years: R120 000

Net gain: -R142 540, over 5 years on an investment of R1 294 000.

Yes, I lost money on my house. Plenty of it. As an investment, it offered returns of -3% annualised over five years. Pass me a kleenex.

Now of course you’re saying that I didn’t really lose that much because I had a roof over my head, but let’s see if you still feel that way after the following mental mathematics.

Would I have spent more if I’d rented?

Rent in 2010 for the same property would have been R7000, but the renter wouldn’t have had to pay levy or rates and taxes like the owner, so I’ll take that off the total rent. In that case, the 2010 rent would have been R5900 (Rates were about R500, levy started off at R600, both increased pretty much in line with inflation).

That means that over 5 years, increasing rent at just 6% a year, a tenant would have spent R399 106 in rent for that exact property. On first glance it looks like the renter would have paid an extra R256 566 (R399 106-R142 540) compared to the homeowner.

But as with all these articles, the bottom line is never really the bottom line. After all, we’re super shrewd savers and investors on this site, not your average Joe Schmo big spender. With that in mind, let’s see what would have happened if I’d invested the money instead. An initial sum of R1 294 000, price plus transfer fees, over a 5 year period. As the 5 year period ends now, I can simply load the Satrix website (Note: Satrix has never paid me for any of these plugs, though I really think they should!) up and plug in the numbers.

Initial investment: R1,294,000
Total investment value after 5 years: R4,469,634.74
Growth on investment (dividends reinvested): R3,175,634.74
Performance per annum (dividends reinvested): 28.13%
Absolute performance (dividends reinvested on payment date): 245.41%

Hmm, so if I take my profit, and then take off R399 106 for my rent payments, I’m still sitting on an extra R2 776 000 in cash after the 5 year period. Time to put away the kleenex and search for LifeLine’s number.

If I add that value to my current portfolio it makes me a rich man! Those figures are for the Satrix Indi, which produced a scorching 28.13% p.a. over the last 5 year period, so the fine print of past results not being an indicator of future results yada yada applies as usual.

That is of course buying the house cash. What about the average person who put down a 10% deposit and made monthly bond payments?

Bond repayment numbers

Initial investment: R129 400
Monthly bond payment @ prime -1.5%: R11 750
Less the net rent that would have been paid: R5 850
Plus the average monthly maintenance paid as an owner: R2 000
Total invest-able amount: R7 900
Total profit from renting and investing the difference for 5 years: R1 485 758,2

So on to the moral of the story.

If you’re trying to decide between buying a house with a bond or renting a similar house, rent the damn thing!

If you’re trying to decide between buying a house cash or renting a similar house, go speak to your psychiatrist, clearly your medication isn’t strong enough.

Not only is a house a bad investment, it also reduces your flexibility:

  • Your likelihood of moving to a new city for a better investment will be far lower if you’re a homeowner rather than a renter.
  • If your neighborhood goes to the dogs, you would be tied to it, and to a sinking asset unless you cut your losses and tried to sell.
  • Your wife falls pregnant with triplets and you need a bigger house… Well then I hope you have a decent stash of cash for diapers, but also because switching houses costs a fortune in time and money.
  • Government goes berserk and makes you want to leave the country. Sorry your now rapidly reducing asset is going to try keep you here.
  • Interest rates go through the roof. Suck it up and keep on paying. Ditto for property taxes.

Now since Mr Malema has asked us to “hand over some of our property“, he clearly has our financial well being at heart. Just make sure you take it with the bond, burnt out pool pump, and don’t forget the wonderful rising damp! Where can I send the thank you card?

Buying vs renting after 20 years

Buying vs renting after 20 years

*Caveat: The main reason I spent so much on maintenance for this house, was because it was built in an area with fairly bad damp. Well damp and the stupid pool. The damp and the cost of HTH, pool pump repairs, electricity for the pool pump is enough to make me feel ill. Worse syill, on selling, a professional damp inspector noted another R80 000 worth of work needed. Of course the consumer protection act means you can’t hide this fact, and therefore my offers were all pretty much reduced by that amount.

*Another caveat: Just like the last time, South African’s are really lousy savers. Having a bond almost forces them to save the value of the house over a 20 years period. I think on average it’s a good thing, but if you’re already saving money, there are far better places to put it than on a second property. And like I’ve said before, if you want to buy a house, buy it. Not because it’ll be a good investment, but because it’s a place you see yourself wanting to live, and a place for your kids to grow up in.

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  • Queen_P

    Wow…really eye opening.

  • patrickza

    Thanks Queen_P. I have to admit, it was eye opening to me too. I was expecting a figure closer to half a mil, but the market was particularly good over the last 6 or so years.

  • Clark

    What about if you wanted to buy a second property as an investment to rent out, say a 1 or 2 bedroom flat for R750 000 – R800 000 in Cape Town and put down a deposit of R100 000. If you got R6500 rent and just needed to cover the difference in bond shortfall and levies of maybe around R1000 -1500 (maintenance should be very low on a flat), my maths could be off as I did rough sums in my head (always dangerous) but would that not be better than placing the R100k in an ETF with R1000 monthly contributions ? Bear in mind that the short fall should also in theory decrease over time.

  • TheDarkRoast

    Could it not just be that you made a poor purchase on a house that needed a lot of repairs?
    In July 2012 I bought a house for the exact same price (R1,260,000) and put down a 12% deposit. My total maintenance costs (plumbing, electrical etc) for the past 33 months came to under R30,000 (including purchasing a second hand stove). Rental income from my tenants for the first 15 months was R8,500 and for the next 18 months has been R10,000 (new tenants) giving me a total rental return of R307,500. Over the same period my bond repayments have been just about break even.
    Yes, I am paying rates of about R550 a month (R18k over the 33 months), but with inflation, I will be upping my rental charged regularly while my bond repayments remain the same; soon making up the shortfall I’m incurring in rates and maintenance and soon surpassing it.
    Now to consider the capital growth. My current tenant has already expressed his wish to purchase the house should I decide to sell… At R2mil. This was without any negotiation or suggestion on my side.
    Now, I think the main differences were, I purchased a house with no pool, outside is almost entirely paved and the inside is either tiled or has laminated wooden flooring. Maintenance is therefore going to be very cheap

    In summary I don’t think it’s fair to put down an entire investment class because of 1 investment example. It would be like talking down equities because you bought Nokia shares in 2007

  • patrickza

    I’ve tried that too, it was a better investment, but still not a great one. Here are the numbers for that: http://investorchallenge.co.za/whites-cant-own-land-in-zimbabwe-excellent/

    That’s not to say it can’t work, I just feel that for it to work you’d need an edge over everyone else. Kind of like trying to beat the market…

  • Darwin

    The article is expressly about a buy to live in property – as opposed to a buy to let property. Your personal data set of 1 deals with the latter.

  • patrickza

    I do admit, I bought a lemon! You on the other hand bought a rocket! Here are the numbers for you:

    Purchase price: R1 260 000
    Selling date: 2015-03-13
    Date of transfer (estimated): 2015-06-01
    Selling price: R2 000 000
    Total profit on sale: R740 000

    Less transfer and bond costs set up costs: R42 500
    Less monthly bond payments: R324 000 (R9000 x 36)
    Plus rental income: R337 500
    Less maintenance on the property over 3.5 years: R42 000 (If you paint your house before selling that could be doubled)
    Less bond cancellation fee: R3 000
    Less cost of electrical compliance: R1000 (if you have an electric fence that’ll be way more!)
    Less capital gains tax: R73 260
    Less agents commission @ 5%: R100 000

    Profit: R491 740

    Your contribution
    Deposit: R151 200
    Rates: R19 800(R550 x 36 months)

    Total if invested in the indi: R374 500

    Your gain over the indi: R117 240

    Very well done, but… your house has appreciated in value by 18% a year, while the average house price appreciation averages just 1% over inflation. That could change the whole equation:

    Purchase price: R1 260 000
    Selling date: 2015-03-13
    Date of transfer (estimated): 2015-06-01
    Selling price: R1 540 000
    Total profit on sale: R280 000

    Less transfer and bond costs set up costs: R42 500
    Less monthly bond payments: R324 000 (R9000 x 36)
    Plus rental income: R337 500
    Less maintenance on the property over 3.5 years: R42 000
    Less bond cancellation fee: R3 000
    Less cost of electrical compliance: R1000 (if you have an electric fence that’ll be way more!)
    Less capital gains tax: R25 225
    Less agents commission @ 5%: R77 000

    Profit: R102 775

    The average person’s contribution
    Deposit: R151 200
    Rates: R19 800(R550 x 36 months)

    Total if invested in the indi: R374 500

    The average person’s loss over the indi: R271 725.

  • TheDarkRoast

    I guess its true that there was an element of luck. I spent an entire year finding the ideal property for my investment while I saved up the deposit. I know that most people are in a bigger rush and don’t pick up the bargains that come around rarely. So 18% pa return is definitely against the grain.
    Eye opening article though, Patrick

  • Jabulani Mabobo

    Most comparisons seem to assume that you have the purchase price in cash which you can invest alternatively.

    I was not a fan of property but recently changed my mind in the process. Property is one of the few investments where you can gear highly and have a stable return overtime. My approach is to buy only properties that are cash positive from day one.

    Since I will be investing in the lower end of the rental market, I expect my rental to be stable and net cash flow will be used to reduce the bond. By factoring an increase in my Net Cash Flow of 4% per annum I would expect to settle the bond in 10 years.

    Purchase price 345,000.00
    Transfer costs 20,000.00
    Renovations 20,000.00
    385,000.00

    Rent 5,500.00
    Bond (3,600.00)
    Levy (1,200.00)
    Rates and taxes (250.00)
    Net cash flow 450.00

  • kinetic static

    you bought the worst kind of property as a savings vehicle and now you want to tell everyone else not to consider property as a savings vehicle. You didn;t bother even touching on the tax considerations relating to a second property. When you buy shares, do you just buy any share? Have you never heard the saying that when it comes to property, location location location, seemed you failed to take that little bit of advice seriously, you got burnt, and now you are crying.

  • I’m not saying you can’t make great returns on property, after all look at the dark roasts case in the comments. What I’m saying is your far more likely to make better returns on the market. I think if you like at the average numbers over the past few years you’d find they’re closer to mine then to the dark roasts.

  • kinetic static

    Your calculations ignore the tax implications of running a rental loss. If you are going to buy an investment property, you will buy in an investment area which will outperform the general property market- as I said location location location. You also discount the fact that a bank will give you a loan to purchase a property, they will never give you a loan to purchase shares on the market. These things you simply ignore and yet they are crucial in making a considered decision.

  • Shortcut

    The question still remains…………………you still would have to and pay for a roof over your head while you are investing in Satrix.

  • Yes, but you’ll notice in my calculations I took into account the amount I would have spent on rent: would have spent R399 106 in rent

  • Shortcut

    The question still remains……………..whether you were paying off a house or paying rent – non of this money was going into satrix. Superfluous money was.

  • Shortcut

    If the house is paid for in cash with no bond repayments there is no way one can lose buying this way……………the monthly bond repayments should have been habitually saved monthly into a aggressive unit trust.

  • I did put the money not spent on bond payments into ETFs, mostly satrix but a few others too. The returns there were great, so while I more than cancelled out any losses from the house, it would have still been better not to have those losses.

    You’re quite right, the first R1.5m is exempt from capital gains, as long as the property is your primary residence, I’ll have to update that in the article. It didn’t have much effect on me, as when you include transaction costs, there was pretty much no capital gain in any case, but if you hit the jackpot with a big property that would be worth a good chunk.

    With ETFs I don’t worry about it either, as for now I’m just accumulating. Post retirement I also plan on living on mostly the dividends, so there shouldn’t be a capital gain event there either, but should I have to sell, I’ll try stay within the R30k exemption. In general if you hold a share or fund for more than three years you’ll be taxed as capital. In under three years you have to make a case that you were investing and not trading, something I wouldn’t like to try.

    I’m not saying you can’t make a huge profit on rental properties, in fact my grandparents funded their retirement on buy to let properties, which was part of the reason I went with that route to begin with. You just have to be a better property investor, or have luck on your side if you want to beat the stock market average returns over time.

    Holland ran the longest ever property price survey some time back, I’ll have to look for the link, but from memory, over a 500 year period property has just barely matched inflation. There are obviously boom and bust periods, so timing can help, but on average you get the inflation rate back. Your only benefit would be the rental income less the rental expenses if it’s a buy to let property.

  • MoneyChief

    Well, lets look at your house as an investment and forget about how you funded it. So assume you bought it cash, Cost price of R1260000 + R34000 transfer costs for a total of R1294000. If you rented it out, your net rent would have been R5900x12 = R70800. So the rental return on this house would have been 5.47%. I believe at the time the interest rate was 10.5%. Already this should have been a red flag. Maintenance on houses run between 0.5% (for newer houses) and 2% (for older houses). So if you subtracted that as well, your return is then 3.47%. Not good.

  • You’re right MoneyChief, it was a terrible investment. They should do these calculations in maths class, it would be so much more valuable than trying to calculate when a car doing 100km/h will overtake a car doing 80km/h that is 3km ahead.

    Instead you learn from those around you. In my family, the only financially independent person was my grandmother, who owned 6 houses, so I copied her blindly, until I actually sat and did the research myself. Had I gone straight to ETFs I’d have been financially independant some time ago already!

  • Carel de Jager

    This was a real bad property man. You paid R1.2 million for a property that generates rent of R7000. I know you know very little about property investments, but believe me, that’s bad! You should have looked for a facebrick property of R900 000 that could have generated R9000 p.month and have capital growth of inflation, and then gear it to the max. Then you could have swopped the kleenex for some champagne!

  • Live and learn. I’ll leave the property investing to the property experts. I have recently seen how some people are using airBNB to really make it work, so it’s not an idea I’d write off completely, just something that you should do all the maths and try to predict all the risks well ahead of even thinking of buying.

  • ElimiNathan

    Agreed this is a TERRIBLE example. Forgetting things like rental being increased at 10% YOY etc. None the less no disrespect to the author who sounds knowledgeable on other investment grounds

  • Well said mate

  • The darkroast have you considered finance cost in your transaction as that relate to real economy in your purchase…

  • Good analysis…but can we bring in element of finance cost and see how the the picture will look like…

  • Dhiraj Sardar

    Would it be useful to think of owning a house as being similar to buying a farm to produce the food you wish to consume?
    Food and shelter should be seen as expenses.
    Both are essential needs that one must cover.
    By purchasing food, you are paying for the convenience of having someone else produce, harvest and present it to you.
    By renting a house, you are paying for the convenience of having someone else build and maintain your place of shelter.

  • Rambo101

    I absolutely love your articles, you should seriously write a book. I’ve done exactly the same calculations and yielded the same results. I currently own a few investment properties in some affluent areas but the math just isn’t working out. If I had placed my initial transfer + reg costs in an investment account compounded at 7% p.a (slightly above inflation), and add my monthly shortfall from the rental property into that account. I would end up with a much higher positive balance. After commission (7.5% recommended), CGT etc. The returns will differ dramatically over 4 years. Imagine over a full 20/25 year term, compounded interest will trump property anytime. I’m selling all of my property beginning now. I’ve already contacted the bank to place a notice of my intent. BTW I work for the bank and get prime -2.5, even with this benefit, the results are no brainers. Thank you for confirming my calculations 🙂

  • Patrick McKay

    Thanks Rambo, that’s a huge compliment! Each case is a little different, but the key, as you seem to have done, is to sit down and think about it while doing all the calculations. All the best with your future investments.