Investing in buy to let at Gateway

Have you considered investing in buy-to-let residential property? It is a solid asset class that delivers compelling returns in the long-term. Most people think about residential property as the house they live in. Whilst your primary property is an investment, it is a relatively poor performing investment compared to property that you buy to rent out.

Investing in residential property is relatively easy to understand as property is a physical asset constructed with brick and mortar versus the seemingly ethereal and complex nature of shares. This makes property an attractive option from a risk and return point of view. It offers both income return, in the form of rental income, as well as capital return, in the form of increased value over time.

Property performs more predictably and with far less volatility than, for example, the share market. The great power in property investment is leverage. Banks will far more readily lend you money against a property than any other asset class. With a relatively small deposit, the bank will help you reap the rewards of property investment.

As a simple example, assume you buy an apartment in the Gateway area for R700K and you put down a 10% deposit, or R70K. In 2014, home prices are expected to go up on average about 8%. Thus, the growth in the value of the property will be R700K x 8% = R56K in the first year. Given that you only put down R70K of your own money, your cash-on-cash return in the first year alone is effectively R56K/70K = 80%.

You will enjoy the capital growth on the full R700K value despite the fact that you only invested R70K of your own money. Over and above this capital return, you will enjoy an income return.

By comparison, if you had invested the same R70K in shares and, assuming they increased at the 2013 JSE average of about 20% for the year, your return would be R70K x 20% = R14K. Your cash-on-cash return would thus be 20%.

The cash-on-cash return of 80% for property compared to 20% for shares illustrates the power of leverage in generating wealth through property investment.

We have covered capital growth, but what exactly is income return? Income return, also commonly referred to as ‘yield’, is calculated as your annual rental income minus operating expenses (e.g. rates and levies) divided by the purchase price. To continue our example above, suppose the rent is R6,000 and rates and levies combined are R1,200. Then the income return or ‘yield’ would be (R6,000 – R1,200) x 12 / R700,000 = 8.2%.

Remember, that in our example, you have a bond with interest to pay. Therefore you will need to foot a small monthly shortfall for the first two years. But with annual increases in the rental, and a bond repayment that is consistent over time, unless the prime interest rate changes, the property will start generating positive cash flow within the first two years or so.

In the Umhlanga area, Gateway offers an ideal opportunity for prospective buy-to-let investors. The area boasts healthy capital appreciation and good yields driven by strong tenant demand.

 Gareth