I regularly get email from readers asking how to interpret the Rent Vs Buy graphs we post. To avoid further confusion here's an explanation. First here's a sample graph: a property on the market for R1 000 000, with a rental of R5 000/month, a current bond interest rate of 15.5% and a bond period of 240 months (20 years).
The first thing to remember is that this is two graphs superimposed on top of each other. The first graph is the Monthly Payment/Cash Flow graph which uses the left hand side Y-axes.
The blue Monthly Payment graph is the amount needed monthly to pay off the bond. For example with a 25% downpayment of R250 000 we see that the bond payment is R10 154/month. The purple Cash Flow graph is what is left over when the bond payment is deducted from the monthly rental. In this case with a 25% downpayment every month we will still be required to pay in R5 154/month to cover the shortfall. As indicated on the X-axis we will only be cashflow positive (CF+) with a downpayment of 63.07%, which is indicated by the Cash Flow graph crossing the lower X-axis.
The second graph is the Return On Investment/Capital Appreciation Required graph and it uses the right hand side Y-axis. The red Return On Investment graph shows what the annual percentage return is on the money invested in the property. In our scenario with a 25% downpayment we see that the ROI is about -25%, which means that covering all the shortfalls will have lost our buyer R62 500 of his downpayment. To make up that shortfall we look at the green Capital Appreciation Required graph, which shows that to cover the shortfall of R62 500 and not lose any money the property needs to appreciate by just over 6%.