Here's a 2 bed apartment in Sea Point in a 'quiet road' (does such a thing exist in Sea Point?) on the market for R980 000. It achieves a gross rental of R3 900/month. With a purchase price of R980 000, monthly payment on a 100% bond will be R12543/month and the difference between rental and bond payment is R8643, well over twice the gross rental (and the net rental income would probably be closer to 2.5 times if note more). Here's the income/yield graph:
Buying in cash you max ROI is 4.78%, about 5%-6% then leaving your money in the bank. With a 50% downpayment you still need 2.8% capital appreciation to not lose any money and you'll only be cash flow positive with a 68% downpayment (over R675 000!). Add in expenses like rates, maintenance and vacancy and the results are even worse
10 comments:
"Lies, damned lies, and statistics"
Most of us here laugh at things like CPI and the House Price Indexes because we know very well the books are cooked and dont reflect the reality on the ground. The scary thing is that not only are the books cooked but that the SARB and the Gov believes its own lies and makes economic decisions based on these. This cooking of the books is explained at StatsSA as internationally accepted practice...yes and just look at how well thats been turning out lately.
Consider rental incomes as part of GDP:
Imputed rent estimates how much rent people who own their homes would pay if they had to pay rent, and assumes that they then pay this amount to themselves. This is the major class of non-market production that GDP includes. Hello what??
A further look reveals "Substitution" which assumes that if the salmon in our CPI basket gets too expensive then people will switch to pilchards...and thats the new price per kilo in our basket.
Or we could look at "Weighting" which assumes that if the price of something like going to the dentist gets too expensive, we all go out and get a bottle of clove oil, ergo dentist visits which are more expensive have a lower weight now than clove oil.
But Hedonics is interesting...a quick google search brings up this as explanation:
Hedonics adjusts the prices of goods as a result of the increased pleasure a consumer derives from a product. A few examples will illustrate how removed the index has moved away from reality. Tim LaFleur is a commodity specialist for televisions at the BLS. In December last year he adjusted the price of a 27-inch television set for quality improvements. The 27-inch television set had a retail cost of $329.99. However, he decided the new model, which still sold for $329.99, had a better screen. After putting this improvement through the governments complex hedonic adjustment model he determined the improvement in the picture was worth at least $135! Taking in this improvement he adjusted the price of the TV by $135, concluding that the price of the TV had actually fallen by 29%! [1] The price reflected in the CPI was not the actual retail store cost of $329.99, but $194.99. The only problem for we consumers is that if we went to Best Buy or Circuit City to buy that TV, we would still pay $329.99.
An ABSA investor report for 2005 states...."In addition to this, a hedonic pricing system for house prices was researched and applied to Absa’s house price data for South Africa."
I am a potential overseas investor who has been looking at properties in Sea Point for the last 3 months. It's been hard looking and I'm still unsure of what investment would give me the biggest return. I have been particularly interested at the posts on this website - all very credible information!
Could someone with a bit more local knowledge than myself please advise me as to what would be the best option in this current climate to maximise my investment? Am i best off buying a bachelor? a 1 bed, a 2 bed, or even a hotel room? I am keen to diversify my portfolio into this region and would be grateful for any tips!
cheers and thanks
Anonymous #2, I'm not sure you're going to get too many buying tips from a blog that has been explicitly outlining the coming property plunge.
I don't think it matters what you buy, as long as you only buy it in 2010 or 2011. Buying any property now is simply a one-way ticket to negative equity. If you're going to pay cash, it might save you some time and legwork just to take your cash and set fire to about 40% of it.
But I think the main point of this blog and others like it is to discourage people from buying property as an investment, full stop. By the time this whole nightmare has run its course (tens of millions unemployed in Europe and the US, countries going back on a gold standard, etc) property is going to be the leper of the investment world - something you live in that appreciates with inflation but doesn't outperform it.
I wonder if you could help me with a query? Have you heard of "transfer of ownership of property" deals where the purchaser pays the owner a deposit (maybe 10%) then have a fixed payment (which usually equals the monthly bond amount) over 20 years. Hereby the seller avoids applying for finance. Is this legal in SA? And do you know where i can find any info on these type of transactions?
Thanks
Anonymous 8:36
It's called 'deed of sale'. and it's indeed legal in SA.
Ownership only transfers to you when you've paid up though. and if you skip payments the seller can take the house back.
Anon # 2, hear what Bean Counter says as it's quite the truth. In addition, the one absolute rule about property in SA is that you just do not buy what you haven't seen and touched. The complete lack of craftmanship and ethics, an utter absence of training in labour, pretty much puts our building industry at the bottom of the rotten pile.
If you're bent on buying, get on a plane and and come see for yourself.
And anyway, why do you want to buy in Sea Point? The place is noisy and infested with streetwalkers, pimps and drugs; unless you're into that kind of thing.
But on the whole, I'd also say wait at least another two years as the leverage is only starting to unwind here. Also, the ZAR is set to weaken substantially over the medium term and that will make your paper loss even worse.
About the only property investment that will keep some value will be to invest in leisure accomodation i.e. to buy a hotel room or such since Cape Town is such a favourite tourist spot and hotel accomodation is always at a premium. Though, personally, I wouldn't touch property right now.
The proof that this property market has a long way to go down still is clearly reflected in a post from yesterday where another Anon mentioned that he's quite happy to pay a bond (at a 300% premium) over rent so that he has the choice to own as many dogs as he wants????? Go figure
if you want to buy a property, go for Tokai. This is a residential area with excellent schools, a lot of greenery, very pleasant. Properties are still selling well in this area.
I know where this property is in Sea Point...right flat bank in the middle of Nigeria central. The property is on a road that is dodgy as hell and full of crack dealers and whores with a shady room by the hour hotel diagonally opposite. Why, in Gods name, would anybody want to buy in this hellhole?
@Joe
I have not heard of anybody making money from buying hotel rooms. apart from the hotel group of course. I may be missing an opportunity here but to me its just too risky as your property value is completely at the mercy of the hotel management and their competancy. My advice, if you are going to buy, buy a freehold house, that way you have no bullshit from body corporates etc. Its yours and you can do what you want with it.
just my 2 cents
*than
Post a Comment