The Edge: Rent Vs. Buy

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.

The Edge: You Just Lost A Lot Of Money

In December 2007 the asking price for a 2 bed/2 bath apartment in The Edge was R1 395 000. Two years later and the asking price for a similar apartment is R1 475 000. That works out to an appreciation of about R40 000/year, about 2.86%/year.

If we bought an apartment for R1 395 000 and then decided two years later to sell at R1 475 000 how much money did we make (or lose)?

If an owner had a 100% bond the bond payments over the last two years were about 17300/month (when interest rates were at 14%) to about R14000 today, so let's make it R15000 as an average just to be conservative. Over two years the total bond payments would have been R360 000 with transfer duty another R75 000. Insurance and maintenance is about 1% of purcahse price per year so another R28 000. So we're looking at total input costs of approximately R460 000.

Despite paying in R360 000 in bond payments, you would only have paid off R40 000 on the loan capital (the balance of R320 000 covering the interest so in actual fact you've been renting from the bank for R13 000/month). Take away the estate agency's 6% commission on selling and you'll walk away with R1 386 500. The balance of the bond is R1 355 000, leaving you with a profit of R30 000.

So that's R30 000 in profit from the sale minus R460 00 in bond payments and purchasing costs leaving you with a net loss of R430 000. What an investment. Put my name down for two.

The Edge: Still Half Empty

The Edge is a development we've written about before. They completed building in April 2006 although they were pre-selling units in 2004. At the time I last wrote 11 units were up for sale (not sure how many of those were resales). According to the developers page (dated May 2006) that has now increased to 15 units on the market! That's just under half the 34 apartments on sale!! If I was an "investor" who is trying to sell and there are still developer owned units (or other "investors" units trying to sell) similar to mine in the building I'd be getting nervous...

The Edge: Rent Vs. Buy

The Edge is a new development right at the top of the CBD in Buitensingel Street. It has just been completed and of the 34 units and according to it's pricelist (dated Dec 2005 so it might be a bit off), 11 are on the block for resale. If you want to buy a 2 bedroom/2 bathroom unit it will cost you at least R1 300 000 (the listed price for a 2bed/1 bath unit). With a 20% deposit that's R10 383 a month plus R1151 in levies. Or you can rent it for R5 800 a month.

The Edge: Rents Are Dropping

In May we wrote that you could rent an apartment in The Edge for R5800 a month. Well it seems there were no takers and the same unit is now renting for R5000 a month. Added to that is the fact that almost half of the block is still for sale.