The Protea North Wharf is another one of those hotels where the hotel owners get their upfront costs subsidised by "investors" who buy rooms (or rather some vaguely defined 'right' to the rooms income) and then get a share of the profits. Now the market for re-selling these 'rooms' is pretty much non-existent so I'm not so certain this 'room' at the Protea North Wharf on the market for R2 200 000 will sell for anything close to that. The ad claims the "average rental" is 10 000 a month which means with a 100% bond the deifference between the monthly bond payment (R29 785) and the rent is 1.9 times the rental itself (R19 785). Let's look at the payment and yield graphs:
So if you plonk down the full R2.2 million asking price in cash you can expect 5.45% return on investment, less than half of the 12%-13% you could get just leaving your money in a fixed deposit. To break even on cash flow requires a 66.43% downpayment, over R1.4 million, and even with a 50% downapayment you still need 2.67% capital appreciation to not lose any money at all.
There are a number of other reasons why this place will probably wind up earning a lot less in income. For one the hotel takes a cut of the rent (can be as high as 40%), and it's not clear here if the R10 000 a month is before or after that is taken into account, although we have assumed it's after. Also this is a hotel room which requires constant maintenance and cleaning so expect levies and maintenance charges to be higher than normal. And as I mentioned before the resale market for these is virtually non-existent.
1 comment:
Hi
It is TRULY AMAZING how many buy-to-let business models are built on the assumption that cash deposits into property should not be counted as "oppportunity costs".
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