Orangerie: You Just Lost A LOT Of Money

Back in 2008 you could buy off plan a 2 bed/2 bath 120m2 duplex at The Orangerie for between R3 100 000 and R3 500 000. Today you can pick one up for R2 650 000.

That's at least a R400 000 drop in capital value not to mention the potentially hundreds of thousands of Rands in bond payments.

And the scary thing is a couple months ago a similar unit was on the market for R2 300 000!

Update: A reader just sent me a link to the latest (dated 3 Jan 2011) price list for the Orangerie

Here's how the prices compare:

Unit	Initial Price	Jan 2011 Price
AG 3	R3,31,2000	R2,850,000
AG 9	R3,445,000	R2,850,000
AG 10	R3,275,000	R2,850,000
BG 3	R3,289,000	R2,850,000
BG 4	R3,312,000	R2,850,000
BG 13	R3,346,000	R2,850,000

If you bought off plan back in 2008 I hope you negotiated your purchase price down. Waaaaay down. Also good luck selling your unit in the near future while it competes with unsold developer stock.

Rent Vs Buy - Gardens Commercial Property

Here's a house in Gardens that has been turned into a small office. It's on sale for R3 400 000 and is tenanted on a two year lease at R18 000. Now before we do anything we need to remember a few things. Firstly this is a commercial property which means that a 33% downpayment is almost certainly mandatory. Secondly because this is commercial property, cash flow is king! Capital appreciation shouldn't even enter the equation.

So what's the yield and payment graph on this place. Let's check it out:


So putting down the minimum required downpayment nets us -13% return on investment, as every month you'll be paying in over R10 000 to cover the bond. Paying for the place in cash gets you 6.35% ROI, about 5%-7% below inflation.

Rent Vs Buy: Gardens - R850 00 Invested = R0 Returned

This 2 bedroomed apartment in Gardens (Thanks to reader GH for the link) is on the market for R1 100 000 and is rented out till the end of August for R4 200/month. Once you take off R389 for rates and R454 for levies then the net rental income is reduced to R3 357/month. Which means that on a 100% bond you'll be paying R14 892 a month and the difference between that and the rental income is a whopping R11 535/month, 3.4 times the rental itself! That's approaching De Waterkant levels of moneylosingness (see I just made up a new word). Here's the income and yield graph, and believe me it ain't pretty:

It's hard to read off the graph but if you bought the place in cash you can expect a handsome return on investment of 3.66%, which is about 7% below the current levels of inflation and about 8-10% below of what you could expect your money to earn in a decent fixed deposit. Even worse to just break even on cash flow you need to plonk down a massive 77.46% deposit, over R850 000! Putting down a 50% downpayment still requires 4.46% capital appreciation to still be able to sell this turkey at break even.

But folks the ad says "Affordable" so you know it's good deal. Why rent when you can buy at four times the monthly cost?

Rent Vs Buy: Gardens - Excellent Views, Not So Excellent Yields

This 24m^2 bachelor flat in Gardens is on the market for R539 000 and has a gross rental income for R2 800. With a 100% bond you'd be paying in an extra R4 497 a month just to cover the R7 297 bond payments, the difference of R4 497 being 1.6 times the rental income. Here's the payment and yield graph.








So a 6.23% ROI if you buy in cash, about 4.5% below inflation. With a 50% deposit 1.89% capital appreciation is required to not lose any money and to break even on cash flow requires a 61% downpayment( over R330 000).

Rent Vs Buy: Gardens - "be hip and not square" and lose R60 000

Here's a one bedroomed apartment in Gardens on sale for R1 100 000. How much rent does it pull in? R4 000 a month. With a 100% bond your monthly repayments will be R14 484, which means that the difference between the bond repayments and the rent (R10 484) is over 2.5 times more than the rental income itself! Here's the payment and yield graph:





Paying for it in cash gets you a retun on investment of 4.36%, only 6% less than inflation. You need a 72% downpayment (R800 000) to break even on cash flow and even if you put down a 50% downpayment you still need 3.54% capital appreciation not to lose any money at all. Considering that the tenant is in till December and prices are not moving, if you bought today then you'll have lost R60 000 by then.

Rent Vs Buy: Gardens - With New Interest Rates

Here's the first Rent Vs Buy using the new prime interest rates at 15%. We have a 41m^2 one bed apartment in Gardens for sale for R675 000 with a net rental of R2 426 per month (R3 500 gross - R1 074 in rates and levies, ouch!). That means with a full bond the difference between the net rental and the monthly payment is 2.6 times the rent itself! Here's the yield and payment graph:

Buying for cash gets you a 4.31% return on investment with a 72.7% downpayment required to break even on cash flow. Putting down a 50% downpayment requires 3.59% capital appreciation just to not lose any money at all.

Rent Vs Buy: Cape Town CBD X 2

Here are two apartments for sale in the city bowl I noticed. The first is 41m^2 one bed apartment in Gardens on sale for R675 000. It has a net rental of R2 600 (R3 500 minus R900 in rates and levies) which means that the difference between the bond payment and the rent is more than twice the rental itself. Here's the yield and payment graph:

Paying in cash you get a pitiful 4.62% return on investment. To break even on cash flow requires a 70% downpayment and with a 50% downpayment the capital appreciation needs to be just over 3% to prevent you losing money.

The second property isn't much better. It's a 42m^2 one bed on sale at the Four Seasons (a specuvestor favourite) for a whopping R829 000 (that's about R20 000/m^2!) with a net rental of R3 300 (R4 000 minus R700 in levies). Here's it's yield and payment graph:

A 4.8% return on investment if you pay in cash, which is about half the inflation rate. Break even on cash flow with a 70% downpayment and 2.9% capital appreciation required to not lose any money even with a 50% downpayment.

Rent Vs Buy: Gardens - And A New Metric To Boot

Here's a 25m^2 bachelor on sale for R449 000 with a net rental of R1 932 a month. If you bought it with a 100% bond the difference between the bond and the rent is just under 2 times the rent itself. Here's the ROI and payments you can expect.

Down Payment	Monthly Payment	Cash Flow	Annual Income	ROI	Cap. Appr. Required
R0	R5747.19	R-3815.19	R-45782.28		10.20%
R44900	R5172.47	R-3240.47	R-38885.65	-86.61%	8.66%
R89800	R4597.75	R-2665.75	R-31989.02	-35.62%	7.12%
R134700	R4023.03	R-2091.03	R-25092.40	-18.63%	5.59%
R179600	R3448.31	R-1516.31	R-18195.77	-10.13%	4.05%
R224500	R2873.59	R-941.59	R-11299.14	-5.03%	2.52%
R269400	R2298.88	R-366.88	R-4402.51	-1.63%	0.98%
R314300	R1724.16	R207.84	R2494.12	0.79%	-0.56%
R359200	R1149.44	R782.56	R9390.74	2.61%	-2.09%
R404100	R574.72	R1357.28	R16287.37	4.03%	-3.63%
R449000	R0.00	R1932.00	R23184.00	5.16%	-5.16%

A not very impressive 5.16% ROI if you buy it all in cash. The eagle eyed of you out there will have noticed a new column on the right hand side "Cap. Appr. Required". This stands for 'Captial Appreciation Required For Break Even' and is the capital appreciation required to make up the difference between the bond and rent payments. For instance on the first row this value is 10.2%, which means that the property has to grow in value by 10.2% (just over R45 000) for the buyer to not have lost any money at all.