The Edge (probably the kakkest name for an apartment block ever) is an old friend here at Cape Town Property Bubble, we've talked about it
many time before. And it's still a terrible "investment" if you're a wannabe buy-to-let specuvestor. For instance a 2 bedroomed, 62m^2 apartment
rents for R6 5000 a month, while the
selling price of an apartment of the same dimensions (also 62m^2 and 2 bedroomed) is R1 395 000.
Now usually we don't include the rates payable each month but in this case we do know it and it's R1357.00 a month which is pretty high for a 62m^2 apartment. So that means your net income is R4843. Just looking at that I can tell the ROI is going to be terrible so here goes:
| Down Payment | Monthly Payment | Cash flow | Annual Income | ROI |
|---|
| R0 | R17855.97 | R-13012.97 | R-156155.63 |
|
| R139500 | R16070.37 | R-11227.37 | R-134728.46 | -96.58% |
| R279000 | R14284.78 | R-9441.78 | R-113301.30 | -40.61% |
| R418500 | R12499.18 | R-7656.18 | R-91874.14 | -21.95% |
| R558000 | R10713.58 | R-5870.58 | R-70446.98 | -12.62% |
| R697500 | R8927.98 | R-4084.98 | R-49019.81 | -7.03% |
| R837000 | R7142.39 | R-2299.39 | R-27592.65 | -3.30% |
| R976500 | R5356.79 | R-513.79 | R-6165.49 | -0.63% |
| R1116000 | R3571.19 | R1271.81 | R15261.67 | 1.37% |
| R1255500 | R1785.60 | R3057.40 | R36688.84 | 2.92% |
| R1395000 | R0.00 | R4843.00 | R58116.00 | 4.17% |
4.17% ROI if you pay for everything in cash and a whopping R1 000 000 deposit needed just to break even on the rental. OUCH.
But here's an interesting point.
In May 2006, over a year and a half ago, the selling price of a 2 bed, 1 bath apartment in The Edge was R1 300 000. Today the asking price is R1 395 000. That's a capital appreciation of barely 7% over 18 months. If you bought that apartment for R1 300 000 back in May 2006 and rented it for R6 500 a month your ROI would be:
| Down Payment | Monthly Payment | Cash flow | Annual Income | ROI |
|---|
| R0 | R17791.97 | R-12948.97 | R-155387.63 |
|
| R139000 | R16012.77 | R-11169.77 | R-134037.26 | -96.43% |
| R278000 | R14233.58 | R-9390.58 | R-112686.90 | -40.53% |
| R417000 | R12454.38 | R-7611.38 | R-91336.54 | -21.90% |
| R556000 | R10675.18 | R-5832.18 | R-69986.18 | -12.59% |
| R695000 | R8895.98 | R-4052.98 | R-48635.81 | -7.00% |
| R834000 | R7116.79 | R-2273.79 | R-27285.45 | -3.27% |
| R973000 | R5337.59 | R-494.59 | R-5935.09 | -0.61% |
| R1112000 | R3558.39 | R1284.61 | R15415.27 | 1.39% |
| R1251000 | R1779.20 | R3063.80 | R36765.64 | 2.94% |
| R1390000 | R0.00 | R4843.00 | R58116.00 | 4.18% |
Again that's a pretty dismal rental yield even with the lower purchase price. Now let's assume you geared up fully and got a 100% bond like a proper specuvestor. Sure you've lost R155 387 because you had to cover the bond but capital appreciation has got you covered right? Well considering the asking price has only increased R95 000 and even if you managed to achieve that full asking price, you've still lost R40 000 in 18 months! In fact unless you put down a greater than R400 000 downpayment even capital appreciation will not make you any money! Then subtract agency commission and other selling costs and the losses are even more.
One of the theories put out there by some is that as the housing bubble collapses rents will go up as people will start to rent over the long term commitment of buying a house. That might hold true when rental stock was in low supply and demand outstripped it. The problem is that the housing bubble grew on the backs of wannabe buy-to-let specuvestors who didn't care that the rent fell short of covering the bond (because capital appreciation is what they were counting on), or who kept the flat empty as they tried to sell their off-plan purchase once constructed. When that doesn't work they either have to keep it empty or try and rent it out and cover some costs. The result: a whole bunch of rentals on the market (especially in new developments) and rents either remaining flat or dropping.
