Rent Vs Buy: Stellenbosch

Here's a 3 bed house in a security complex in Stellenbosch on the market for R1 395 000 and which is currently rented out till November for R6 000 a month. With a 100% bond the monthly bond repayment will be R17 974 a month nearly R12 000 a month more than the going rent. Here's the payment and yield graph:



Buying in cash gets you a return on investment of 5.27% with 2.63% capital appreciation required just to not lose any money. Cash flow breaks even with a 66% downpayment, nearly R900 000! And these figures are overstated as rates, levies, maintenance and vacancy have not been taken into account.

Rent Vs Buy: Green Point - Since When Is 5% Yield A Selling Point?

This apartment in Green Point is on sale for R1 895 000 (and on auction soon afterwards) with a tenant in till March 2009 paying R8 500 a month. I love how the ad puts 5% yield right in the ad title, as if a return on investment 5% below inflation is a good thing. With a 100% bond the difference between the rent and the bond payments is just under twice the rental itself. Here's the payment and yield graph:


5.38% ROI when you buy in cash with 2.52% capital appreciation required with 50% down not to lose any money at all. To be cash flow positive you need to put down a whopping R1 250 000 (65%). Not exactly a "great investment/great buy" is it?

Rent Vs Buy: Blouberg - "Expected" excellent buy

Here's a (by the looks of it) newly completed 2 bedroom apartment in Blouberg on sale for R1 095 000 with an "expected" gross rental of R5 000 a month. With a 100% bond the difference between the bond payments and the rent is almost double the rental itself. Here's the payment and yield graph:






So less than 5.5% return on investment if you pay in cash and 65% downpayment required to break even on cash flow. Even with a 50% downpayment (over R500 000) you still need close to 2.5% capital appreciation required not to lose any money.

Rent Vs Buy: City Bowl

Here's a 2 bed victorian cottage in the City Bowl on sale for R1 350 000 which will attain a rent from R6 600 from June, so I estimate it gets about R6 000 now. With a full bond the difference between the rent and the bond payment is a touch under double the rental alone. Here's the income and yield graph:

All in all pretty bad. Sub 6% return on investment with 62% downpayment required to break even on cash flow. With a 50% downpayment you still need 2% capital appreciation to not lose any money at all.

Inflation Breaks 10%

CPIX at double digits as era of low inflation ends

INFLATION rocketed by more than 10% last month, scaling a new five-year peak that was well above expectations and encouraging speculation the Reserve Bank will raise interest rates at its next policy meeting in June.
The annual rise in CPIX, SA’s main inflation gauge, speeded up to 10,1% from 9,4% in February — its highest since December 2002, data from Statistics SA showed yesterday.

The next rate hike is guaranteed. I suspect the odds for two more after that are greatly increased.

Three More Rate Hikes Before The End Of The Year?

It is possible.

There is a 70% chance of another 50 basis points interest rate adjustment, taking prime to 15.5%, and an even chance of two additional hikes before year-end, according to senior economist from Credit Guarantee Insurance Corporation, Luke Doig.

"Most confidence surveys paint a bleak picture, while expectations don't indicate any imminent recovery," he says.

Rent Vs Buy: Rosebank

This "cute" victorian cottage in Rosebank is on sale for R849 000 with a gross rental of R4 000 a month. With a 100% bond the difference between the rent and the bond payments is just under twice the cost of the rent itself. Here's the payment and yield graph.

Paying for it in cash gives you a 5.65% return on investment, with 64% required just to break even on cash flow. Even with a 50% downpayment you need 2.25% capital appreciation just to not lose any money. The actual returns will be lower once levies, rates, maintenance and vacancy costs are taken into account. But you do "save" R17 000 because the transfer duty is included in the price, which is barely 2 1/2 months shortfall if you buy it with no money down.

The Estate Agent Cull Begins

Waaaay back in September 2006 we linked to a story that indicated that were double as many agents in SA as there needs to be. Despite having 77 000 - 80 000 Neville McIntyre, chief executive of Jigsaw Holdings (which includes estate agencies Aida and Realty) said the market can only really support 36 000.

Today in Business Day Herschel Jawitz, CE of Jawitz Properties states he believes there will only be a decline in about 10 000 - 15 000 agents. However Lew Geffen of Sotheby's International Realty repeated Neville McIntyre's conclusion:

I think by year end there will only be about 36000 estate agents

Investors Exit The Market

I think we'll start seeing a lot more ads like this one. Here's an ad from an investor unloading his entire portfolio of 18 properties all over the Cape ("Noordhoek to Grabouw") for R7 000 000. The properties have a "potential rental" of R46 000 a month, which either means they are currently renting for less than that or some properties are sitting vacant. According to my calculations if you achieve that "potential rental" and you want to be cash flow positive you'll need to put down at least R3 500 000. It must be a great feeling 'investing' R3 500 000 and not actually making any money. I also doubt that R46 000 rental includes rates, levies and other ownership costs.

This 2 bed apartments in Noordhoek seems to be one of the apartments they're trying to sell off. It's for sale for R615 000 and has a gross rental of R3 000. Here's the yield and payment graph.

Paying in cash yields a 5.85% return on investment, with a 63% downpayment needed to break even on cash flow. Just to not lose any money at all with a 50% downpayment requires just over 2% capital appreciation. Again this is before rates, levies, maintenance and vacancy costs.

Rent Vs Buy: Observatory - "Excellent Investments" Yield 3% Below Inflation?

Here's an "excellent investment" bachelor pad in Observatory on the market for R570 000 with a rental of R2 800. With a full bond the difference between the rent and the monthly payments is just
over 1.5 times the rent itself. Here's the yield and payment graph:

Before rates, levies, maintenance and vacancy costs are taken into account purchasing the place for cash gets you a mere 5.89% about 3% below official inflation numbers. A 62% downpayment is required to break even on cash flow and even with 50% downpayment 2% capital appreciation is required to not lose any money at all.

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.

More Rate Hikes To Come

Rate hikes: Expect more

After what we heard today, I am still expecting another rate hike in June or August, given the way Mboweni was talking how the Bank has reacted to the electricity price increases, and how we can see inflation into double digits.

I won't be surprised to see another hike in June.

Reserve Bank Hikes Repo Rate 50 Points

Mboweni hikes rates as inflation risks remain

The South African Reserve Bank's (Sarb) Monetary Policy Committee (MPC) ended its two-day meeting on Thursday by announcing it would hike the repo rate by 50 basis points, bringing the rate at which it lends to banks to 11.5 percent.

In line with new policy, the repo decision was announced first as opposed to at the end of the statement.

Commercial banks prime overdraft rates will almost certainly rise by 0.5 percent to 15 percent from the current 14.5 percent.

I think we might see further rates hikes this year.

Agents Start To Panic: Round 2 - Observatory

The amount of inventory sitting on agents books must be piling up because I received the following email detailing agents putting pressure on sellers to lower prices in Observatory, which ironically enough is supposed to already be one of the more affordable areas in Cape Town:

During the past week, we contacted all the owners of property on the market in Observatory and asked them to reduce their asking prices in an attempt to make house prices more affordable. Below is the result of our efforts:

87 ARNOLD STREET: REDUCED FROM R780 000 TO R750 000. An immaculate lock-up-and-go property with low maintanace. Two huge bedrooms with built-in cupboards here, an open plan lounge that overlooks the back garden, a fitted kitchen and pleasant bathroom.

17 IRWELL STREET: REDUCED FROM R845 000 TO R795 000. Two bedrooms, two bathrooms and an outside room with a w/c and basin in this sunny home in a tree-lined street.

6 ROBINS ROAD: REDUCED FROM R915 000 TO R865 000. Modernized Victorian home in excellent condition. Two bedrooms with open plan living between the kitchen, lounge and private courtyard.

31 LOWER COLLINGWOOD ROAD: REDUCED FROM R1 100 000 TO R995 000. Freestanding home with three bedrooms, two bathrooms, a study and large garden. Secure parking too, in a quiet position close to the greenbelt area by the Liesbeek River.

22b. ASH STREET: REDUCED FROM R1 150 000 TO R1 100 000. Most unusual home with two bedrooms and a big and private garden and a separate self-contained wooden house hiding in one corner of the property. Secure parking too.

The largest drop was 9.5% (from R1 100 000 to R995 000) the smallest 3.8% (R780 000 to R750 000).

Rent Vs Buy: City Bowl - An Albatross For Years To Come

Here's a 2 bedroomed apartment in the City Bowl on the market for R1 195 000 with a rental of R5200 a month and tenanted till December 2008. Described as a "Good investment for years to come." The difference between the rent and the bond payment is just under twice the rental. Here's the yield and payment graph.
Sub 6% returns if you buy it for cash witha 66% downpayment required to break even on cash flow and 2.46% capital appreciation required even if you put down a 50% deposit and of course these numbers will be lower once rates, maintenance and vacancy costs are taken into account. But hey you've got a tenant locked in till December! The sucker!

Rent Vs Buy: Hermanus - Let's Be Realistic

Here's a house in Hermanus on sale for R1 800 000. It rents for R5 000 and has a cottage on the property that produces another R2 500 a month in rent for a grand total of R7 500 a month in rent. The house was previously listed for R1 990 000 but the seller chopped R190 000 (almost 10%) off the price to 'be realistic'. That being said if you took out a full bond the difference between the rent and the bond is double the rental itself. Here's the income yield and payment graph.
So paying for the place in cash gets you a dismal 5% return on investment (about half current inflation). You're cash flow positive with 67% downpayment (well over R1 million) and even with a 50% downpayment you need 2.68% capital appreciation to not lose any money at all. And once again that's before rates, maintenance (which will be considerable on a property this size) and vacancy costs.

Going Up And Coming Down Aren't Equal

I've often heard people make the comments that "if property prices drop 20% it doesn't matter because they've appreciated 40% so I still have 20% appreciation". That assumption is incorrect. For example let's say your house had a starting price of R1 000 000 and a appreciated 40% to R1 400 000. A 20% depreciation will reduce the price to R1 120 000, not R1 200 000, which is only a 12% appreciation. The following graph illustrates this:
The green line is what people expect to happen - x appreciates by 20% and then depreciates by 20% to come back to x - the red line is what actually is required - x appreciates by 20% and then only has to depreciate by 16% to go back to x.

So when Standard Bank says that the median price has depreciated 5%, this means that in fact that 5.25% of appreciation is wiped out. Larger drops wipe out even more - 10% depreciation wipes out 11% appreciation, 20% depreciation wipes out 25% appreciation and 30% depreciation wipes out 42% appreciation.

Estate Agents Start To Panic

The 70 000 estate agents in SA (about 30 000 too many) are starting to panic as the property market in SA goes over a cliff. Sellers have become accustomed to high prices but as the market deteriorates agents who are desperate to make a commission (for some their only commission of the year so far) are urging them to consider every offer. From RealEstateWeb:

Reject today's offer at your peril - agents

Greedy, stubborn sellers will regret holding out for a higher price. That's the message from a number of estate agency bosses, as residential market volumes drop off dramatically.

The latest to issue such a warning is Lew Geffen, chairman of Sotheby's International Realty SA, who believes the residential property market is much worse than recent figures from Absa suggest.

Geffen goes on to say that last year's prices are now unobtainable. With every bank predicting further weakening in the market how long before Geffen starts begging sellers to forget about 2006 prices? And then 2005 prices?

Rent Vs Buy: Belville - The Low End Doesn't Produce High Yields

Bank economists and real estate agents continue to claim that despite the slowdown in the market the low end of the market is where all the money is being made. Here's a 2 bed flat in Belville, an 'Excellent investment' on sale for R580 000 which rents for R2 800 a month. With a 100% bond the difference between the rent and the bond (R4623) is about 1.65 times the rent, which while not great is one of the better numbers we've seen. Here's the yield and payment graph:



A 5.79% max return on investment, and that's before rates, maintenance and vacancy costs, isn't great. With a 50% downpayment you need 1.9% capital appreciation to not lose any money and break even on cash flow is at 62% downpayment.

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: Muizenberg - Potential For Low Yields

We're on a bit of a Muizenberg kick today. Here's a 1 bed apartment for sale for R900 000 with a 'rental income potential' of R3 500 a month. The difference between the rent and the bond payment is over two times the rent itself if you took out a full bond. Here's the income yield and payment graph:

So if you buy the place in cash you can expect a 4.67% return on income, about 5% below inflation. With a 50% downpayment the property still has to appreciate 3% to prevent you from losing money and breaking even on cash flow is only possible with a 70% downpayment. Yields would be even less if you took into account rates, levies, maintenance and vacancy costs.

Rent Vs Buy: Muizenberg - 15% Is In The Bag

Here's a 1 bed(?) apartment in Muizenberg is on sale for R795 000 and 'may command a rental upwards of R3 000' (or it may not). Levies are R630/month bringing the net rental to R2 370. Which means that on a 100% bond the difference between the rent and the bond is 3.3 times the bond itself. That means some horrible rental yields but never fear because according to the ad it has an '...estimated growth rate 10-15% pa'. I guess someone hasn't been paying attention to the news? Here's the payment and yield graphs:



So if you pay in cash you van expect a 3.58% return on investment. With a 50% downpayment the property has to appreciate by 4.4% just to not lose any money at all. a 76% downpayment is require d to break even on cashflow.

Muizenberg: Villa D'Algarve Is Full Of Specuvestors

Villa D'Algarve is a recently completed development in Muizenberg and, as expected in a new development, it's full of specuvestors trying to sell the properties they bought off plan and had no intention of ever living in. Here's three recent ones I found on Gumtree:

• 3 Bed Unit - R835 000


• 2 X 3 Bed Unit - R795 000/R849 000 (Most hilarious part of the ad, the title "My Beautiful Lady. I will miss you". Like they ever spent an actual night there!)


• 3 Bed Unit - R865 000

Rent Vs Buy: Cape Town CBD - What You Lose In Rent You'll Save In Petrol

Here's an apartment in the Cape Town CBD on sale for a cool R1 000 000. I'm not sure how many bedrooms it has but when you consider it rents for R3 800 a month I guess it only has one. If you took out a 100% bond the difference between the rent and the monthly bond repayment is 2.36 times the rent itself. Here's the yield and payment graph (RIP Tables. You served us well but we're moving into the 21st century here and the future is visual!)


So a 70% downpayment is required to break even on cashflow, and with a 50% downpayment you still need 3.12% capital appreciation to not lose any money at all. If you do plonk down a bar to buy the place outright you can look forward to a 4.56% annual return on investment. That's only 4% below inflation (well the official numbers at least). And of course there's the tiny fact that this excludes rates, levies, maintenance and vacancy costs.

Property Prices Drop

Folks. This ain't no April fool. It's official. Moneyweb reports that South African house prices fell for the first time in 8 years. According to Standard Bank house price growth -5.2% from March last year.

Traffic In The Southern Peninsula About To Get A Lot Worse

If you're thinking of buying in the next two to three years and you work in the Cape Town CBD you might want to give the South Peninsula a miss. The work on Hospital Bend on the M3/N2 has just started which affects the whole of the Southern Suburbs but now more roadworks are starting between Muizenberg and Clovelly.

Construction headache for residents

South Peninsula residents should brace themselves for huge traffic delays and gridlock from Monday onwards, as construction of a multimillion rand upgrade of the main road between Muizenberg and Clovelly gets under way.

The upgrade, which is expected to take about three years to complete, is also expected to have a negative effect on businesses situated along the narrow 4km stretch of road.

About 19 000 cars use the road on a daily basis.

Rent Vs Buy: Plumstead - The Low End Produces Low Yields

This 55m^2 2 bedroomed flat in Plumstead is on sale for R650 000 and is currently tenanted till the end of the year for R3600 a month. The difference between the rent and the bond payments if you took out a 100% bond is only 1.33 times the rent which is one of the better numbers we've seen and I would expect that for a property on the low end. Here are the payments and return on investments in graphical and tabular form:

Down Payment	Monthly Payment	Cash Flow	Annual Income	ROI	Cap. Appr. Required
R0	R8319.99	R-4719.99	R-56639.83		8.71%
R65000	R7487.99	R-3887.99	R-46655.84	-71.78%	7.18%
R130000	R6655.99	R-3055.99	R-36671.86	-28.21%	5.64%
R195000	R5823.99	R-2223.99	R-26687.88	-13.69%	4.11%
R260000	R4991.99	R-1391.99	R-16703.90	-6.42%	2.57%
R325000	R4159.99	R-559.99	R-6719.91	-2.07%	1.03%
R390000	R3327.99	R272.01	R3264.07	0.84%	-0.50%
R455000	R2496.00	R1104.00	R13248.05	2.91%	-2.04%
R520000	R1664.00	R1936.00	R23232.03	4.47%	-3.57%
R585000	R832.00	R2768.00	R33216.02	5.68%	-5.11%
R650000	R0.00	R3600.00	R43200.00	6.65%	-6.65%

So a sub 7% return on investment before maintenance, rates, levies and vacancy are taken into account. There's a 60% downpayment required to break even on cashflow and even with a 50% dowpayment a 1% increase in capital appreciation is required to not lose any money.

Rent Vs Buy: Strandfontein - Where? How Much?

I have no idea where Strandfontein is, what I do know is that this 6 bed(!) house has a terrible rent/price ratio. It's on sale for R1 499 000 and has a 'potential rental income' of R6 000 a month. If you took out a 100% bond the difference between the rent and the bond payments is more than double the rental itself.

Down Payment	Monthly Payment	Cash Flow	Annual Income	ROI	Cap. Appr. Required
R0	R19187.17	R-13187.17	R-158246.00		10.56%
R149900	R17268.45	R-11268.45	R-135221.40	-90.21%	9.02%
R299800	R15349.73	R-9349.73	R-112196.80	-37.42%	7.48%
R449700	R13431.02	R-7431.02	R-89172.20	-19.83%	5.95%
R599600	R11512.30	R-5512.30	R-66147.60	-11.03%	4.41%
R749500	R9593.58	R-3593.58	R-43123.00	-5.75%	2.88%
R899400	R7674.87	R-1674.87	R-20098.40	-2.23%	1.34%
R1049300	R5756.15	R243.85	R2926.20	0.28%	-0.20%
R1199200	R3837.43	R2162.57	R25950.80	2.16%	-1.73%
R1349100	R1918.72	R4081.28	R48975.40	3.63%	-3.27%
R1499000	R0.00	R6000.00	R72000.00	4.80%	-4.80%

A sub 5% yield if you pay in cash and that's excluding rates, levies, maintenance and vacancy. You'll break even on cashflow with 70% downpayment and with a 50% downpayment you still require nearly 3% in capital appreciation to not lose any money.

For Some It Makes No Sense To Buy

Reader TH sent us an email detailing his situation and why for him it makes absolutely no sense to buy despite having the means. TH has been pre-approved for a bond but his rent is so low - less than R3 500/month for a townhouse in the Southern Suburbs (which is crazy good value) with a nice landlord and great neighbours - that it really isn't worth it. Just the amount spent on transfer and buying costs is probably about two years rent.

In fact he lives virtually rent free because the interest earned solely from his money market investments is more than double his rent for the year. And that does not include his interests in the stock market (which is lot easier to sell if things turn south) or the fact that he's saving nearly half his salary every month.

For the amount he pays in rent it just isn't worth it.

Bond Rates: Which Way Are They Headed?

Here is a graph of the offered bond rates from First National Bank from 1986 to the end of 2007 (source)

So with the US heading into recession, inflation rates locally heading to record levels and the property market hitting a wall which way do you expect rates to go?

Edit: I changed the graph type to a step graph which is more suitable for interest rates.

Liquidations: Up 20%, 100% For Real Estate

Here's another indicator that the SA real estate market isn't doing so hot. Year on year company liquidations are up 20%, but in the real estate, finance and insurance sector it's up 100%.

Century City - Down And Up And Down And Up Again

Well this Century City flat that we've been tracking since September 2007 started off at R799 000, then dropped to R780 000, then went up to R800 000, then back down to R780 000 at the beginning of March and is now... back up to R790 00. It still has a rental of R3500 ( minus R1 156 in rates and levies) a month which means the ROI is still terrible:

Down Payment	Monthly Payment	Cash Flow	Annual Income	ROI	Cap. Appr. Required
R0	R10111.98	R-7768.98	R-93227.79		11.80%
R79000	R9100.78	R-6757.78	R-81093.41	-102.65%	10.26%
R158000	R8089.59	R-5746.59	R-68959.03	-43.64%	8.73%
R237000	R7078.39	R-4735.39	R-56824.65	-23.98%	7.19%
R316000	R6067.19	R-3724.19	R-44690.27	-14.14%	5.66%
R395000	R5055.99	R-2712.99	R-32555.89	-8.24%	4.12%
R474000	R4044.79	R-1701.79	R-20421.52	-4.31%	2.59%
R553000	R3033.59	R-690.59	R-8287.14	-1.50%	1.05%
R632000	R2022.40	R320.60	R3847.24	0.61%	-0.49%
R711000	R1011.20	R1331.80	R15981.62	2.25%	-2.02%
R790000	R0.00	R2343.00	R28116.00	3.56%	-3.56%

3.56% ROI if you buy it in cash, 4% capital appreciation required with a 50% downpayment to not lose any money and a 80% downpayment required to break even on the rental. I'll take two!

Inflation: It's Not Looking Good

Consumer price inflation just pierced the 9% barrier (to 9.4% up from 8.8% in January!). With the tarriff increases that Eskom wants we can expect double digits before the end of the year. The Reserve Bank is not going to have much choice, I expect a rate hike in April with possibly more on the way.

Rent Vs Buy - Paarl

Here's a 2 bed apartment in Paarl for sale for R850 000 (R70 000 below market value the ad claims). It currently rents for R4 000 and if you take out a full bond the difference between the bond payments and rent is just over 2.5 times the rent itself. Here's the payment and ROI you can expect.

Down Payment	Monthly Payment	Cash Flow	Annual Income	ROI	Cap. Appr. Required
R0	R10879.98	R-6879.98	R-82559.77		9.71%
R85000	R9791.98	R-5791.98	R-69503.79	-81.77%	8.18%
R170000	R8703.98	R-4703.98	R-56447.82	-33.20%	6.64%
R255000	R7615.99	R-3615.99	R-43391.84	-17.02%	5.10%
R340000	R6527.99	R-2527.99	R-30335.86	-8.92%	3.57%
R425000	R5439.99	R-1439.99	R-17279.89	-4.07%	2.03%
R510000	R4351.99	R-351.99	R-4223.91	-0.83%	0.50%
R595000	R3263.99	R736.01	R8832.07	1.48%	-1.04%
R680000	R2176.00	R1824.00	R21888.05	3.22%	-2.58%
R765000	R1088.00	R2912.00	R34944.02	4.57%	-4.11%
R850000	R0.00	R4000.00	R48000.00	5.65%	-5.65%

So a sub 6% ROI and that's before rates/levies, maintenance and vacancy costs. A 70% downpayment is required to break even on cash flow and even with a 50% downpayment you need 2% capital appreciation just to not lose any money at all.

There is also a R5000 a month rental subsidy offered, which is no doubt factored into the price and which you'll be paying back over 20 years. I bet that if nstead of a rental subsidy you ask for R60 000 off the asking price you'll get a quick 'no'. Everyone needs to protect their commissions.

Rent Vs Buy: Gordon's Bay

Gordon's Bay is a nice place but the rent/price ratio that can be achieved there is pretty grim. Here's a 2 bed flat on sale for R650 000 that rents for R2 800 a month. That means if you took out a 100% bond the difference between the rent and the bond payments is just under 2 times the rent itself. Here's the payments and ROI you can expect:

Down Payment	Monthly Payment	Cash Flow	Annual Income	ROI	Cap. Appr. Required
R0	R8319.99	R-5519.99	R-66239.83		10.19%
R65000	R7487.99	R-4687.99	R-56255.84	-86.55%	8.65%
R130000	R6655.99	R-3855.99	R-46271.86	-35.59%	7.12%
R195000	R5823.99	R-3023.99	R-36287.88	-18.61%	5.58%
R260000	R4991.99	R-2191.99	R-26303.90	-10.12%	4.05%
R325000	R4159.99	R-1359.99	R-16319.91	-5.02%	2.51%
R390000	R3327.99	R-527.99	R-6335.93	-1.62%	0.97%
R455000	R2496.00	R304.00	R3648.05	0.80%	-0.56%
R520000	R1664.00	R1136.00	R13632.03	2.62%	-2.10%
R585000	R832.00	R1968.00	R23616.02	4.04%	-3.63%
R650000	R0.00	R2800.00	R33600.00	5.17%	-5.17%

If you pay for the property in cash you can expect just over a 5% rental return and that does not take into account rates, levies, maintenance and vacancy costs. A 70% percent deposit is required to break even on cash flow and if you put down a 50% deposit you'll need 2.5% capital appreciation just to not lose any money at all.

Rent Vs Buy: Lower Gardens - Lower Yields As Well

Here's a 1 bedroomed apartment in Lower Gardens described as an 'investment for years to come'. Well that's partly true as you're going to have to hold onto this thing for a loooong time if you want to make any money out of it. It's on sale for R850 000 and has a net rental income of R3 250 (R4 000 - R750 in levies). If you buy it with a 100% bond the difference between the bond and the rent is about 2.3 times the actual rent. Here's the ROI and payments required.

Down Payment	Monthly Payment	Cash Flow	Annual Income	ROI	Cap. Appr. Required
R0	R10879.98	R-7629.98	R-91559.77		10.77%
R85000	R9791.98	R-6541.98	R-78503.79	-92.36%	9.24%
R170000	R8703.98	R-5453.98	R-65447.82	-38.50%	7.70%
R255000	R7615.99	R-4365.99	R-52391.84	-20.55%	6.16%
R340000	R6527.99	R-3277.99	R-39335.86	-11.57%	4.63%
R425000	R5439.99	R-2189.99	R-26279.89	-6.18%	3.09%
R510000	R4351.99	R-1101.99	R-13223.91	-2.59%	1.56%
R595000	R3263.99	R-13.99	R-167.93	-0.03%	0.02%
R680000	R2176.00	R1074.00	R12888.05	1.90%	-1.52%
R765000	R1088.00	R2162.00	R25944.02	3.39%	-3.05%
R850000	R0.00	R3250.00	R39000.00	4.59%	-4.59%

4.59% maximum yield if you buy the whole thing in cash, and that's before maintenance and vacancy. An 80% downpayment is required to break even on cashflow and if you take out a 50% bond you'll need 3.09% capital appreciation just to not lose any money at all.

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.

Rent Vs Buy: Parow - If This Is High Yield Then I'd Hate To See A Low Yield

We don't normally cover Parow but this ad for a 2 bed flat caught my eye. It's described as "high yield" and is on the market for R475 000. It has a net rental of R1 770 (R2 448 - R678 in rates/levies) which means if you bought it with a 100% bond the difference between the net rental and the bond is nearly 2.5 times the net rental itself. Here's the ROI and payments you can expect:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R6079.99	R-4309.99	R-51719.87
R47500	R5471.99	R-3701.99	R-44423.89	-93.52%
R95000	R4863.99	R-3093.99	R-37127.90	-39.08%
R142500	R4255.99	R-2485.99	R-29831.91	-20.93%
R190000	R3647.99	R-1877.99	R-22535.92	-11.86%
R237500	R3039.99	R-1269.99	R-15239.94	-6.42%
R285000	R2432.00	R-662.00	R-7943.95	-2.79%
R332500	R1824.00	R-54.00	R-647.96	-0.19%
R380000	R1216.00	R554.00	R6648.03	1.75%
R427500	R608.00	R1162.00	R13944.01	3.26%
R475000	R0.00	R1770.00	R21240.00	4.47%

I wouldn't exactly describe a maximum ROI of 4% below inflation as 'high yield', but that's just me. An 80% downpayment is needed to break even on cashflow. Putting down a 50% downpayment still requires capital appreciation of 3.2% just to not lose any money in the first year.

Rent Vs Buy: Parklands - If The ROI Doesn't Kill You The Traffic Will

Aaah Parklands. If ever there was a better example of soul crushing suburbia I have yet to see it. Here's a 3 bed duplex for sale for R1 090 000, which currently rents out for R4 000 a month. If you took out a 100% bond the difference between the bond and the rental is nearly 2.25 times more than the rental itself.

Here's the payments and return on investments you can expect to make:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R13951.98	R-9951.98	R-119423.71
R109000	R12556.78	R-8556.78	R-102681.34	-94.20%
R218000	R11161.58	R-7161.58	R-85938.97	-39.42%
R327000	R9766.38	R-5766.38	R-69196.60	-21.16%
R436000	R8371.19	R-4371.19	R-52454.22	-12.03%
R545000	R6975.99	R-2975.99	R-35711.85	-6.55%
R654000	R5580.79	R-1580.79	R-18969.48	-2.90%
R763000	R4185.59	R-185.59	R-2227.11	-0.29%
R872000	R2790.40	R1209.60	R14515.26	1.66%
R981000	R1395.20	R2604.80	R31257.63	3.19%
R1090000	R0.00	R4000.00	R48000.00	4.40%

An 80% downpayment required just to break even on the rent and if you put down the entire asking price in cash you can expect a 4.4% ROI, which is about 3.5% below
inflation and 5.3% below leaving your money in the bank.

Thanks to reader KR for emailing me this one.

Expect Another Interest Rate Hike In April

Brace for another rate hike

Nedbank chief economist Dennis Dykes on Tuesday said there is now a "significant" danger of another hike in interest rates in April.

The presentation was conducted in conjunction with the French South African Chamber of Commerce and Industry.

Dykes said two weeks ago he would have forecast a 45 percent risk of a rate hike but current conditions had now worsened to such an extent that the expectation is 55 percent.

Considering that Eskom wants to raise tariffs a minimum of 14% (they're appealing to have it raised 24%!!) and petrol price having gone up R1.40 in the last three months I see the chances of an interest rate hike as as a lot higher.

If the rate is hiked, it would mean that the bond rate would be at 15%. That means that for a R960 000 house (the average house price in South Africa according to ABSA) your monthly payment on a 100% bond would be R12 641 a month. If your bond payments should not exceed a third of your income it means that the average household income in South Africa should exceed R36 000 a month. Somehow I don't think that's true.

A Question: Better To Sell With Tenant Or Without?

I have a question for the readers out there. If you're trying to sell an 'investment property' is it better to do so with or without a tenant. I ask this because I see lots of examples (here, here and here and that's just this month) of sellers trying to sell property with long term tenants in place.

Here's another example a two bedroomed apartment in Woodstock looking for renters (asking rent R4 800) on the 13th of February and then a month later the same apartment is for sale (asking price R880 000), now with a renter in place.

I see two options here. Either the seller believes that an existing tenant will help it sell or the seller can not stomach the bond costs and needs a renter to make up the shortfall. If I were looking for an investment property buying an apartment with an existing tenant, especially a long term tenant would be a definite no-no for the following reasons:

1. I would not have been the one to have vetted the tenant
   
2. I would not have set the rent, nor any rent escalation clauses in the lease agreement
   
3. I would not have set the length of the lease agreement

For those reasons if I were selling an 'investment property' I would sell one with no tenant, and if I were buying I would buy one without a tenant.

So dear readers correct me if I am wrong: Is it better for a property to be sold with or without a tenant?

Rent Vs. Buy: Stellenbosch X 2

Out of nowhere there seems to be a rash of properties from Stellenbosch popping up (See examples one and two) with horrible price/rent ratios. And so to carry on the trend here's two more.

First up here's a 3 bed house in a security estate for sale for R1 215 000. It's currently renting for R5 000 a month (at least till November). If you bought it with a 100% bond the difference between the bond and the current rental is just over two times the rent. The ROI and payments are:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R15551.97	R-10551.97	R-126623.67
R121500	R13996.78	R-8996.78	R-107961.31	-88.86%
R243000	R12441.58	R-7441.58	R-89298.94	-36.75%
R364500	R10886.38	R-5886.38	R-70636.57	-19.38%
R486000	R9331.18	R-4331.18	R-51974.20	-10.69%
R607500	R7775.99	R-2775.99	R-33311.84	-5.48%
R729000	R6220.79	R-1220.79	R-14649.47	-2.01%
R850500	R4665.59	R334.41	R4012.90	0.47%
R972000	R3110.39	R1889.61	R22675.27	2.33%
R1093500	R1555.20	R3444.80	R41337.63	3.78%
R1215000	R0.00	R5000.00	R60000.00	4.94%

A sub 5% ROI if you buy in cash (only 3.5% below inflation, that is if you believe governments figures in the first place) with a 70% downpayment required to break even. And this is the return before rates, maintenance and vacancy cost.

The second example is an interesting one. It's a 10 bedroomed student house for sale for R3 950 000, an 'opportunity for the investor' as the ad says. It currently rents out for R15 600 a month which means that if you bought it with a 100% bond the difference between the bond and the rent is 2.2 times the rent, nearly R35 000 a month. The rest of the payments and return of investment is as follows:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R50559.91	R-34959.91	R-419518.94
R395000	R45503.92	R-29903.92	R-358847.05	-90.85%
R790000	R40447.93	R-24847.93	R-298175.15	-37.74%
R1185000	R35391.94	R-19791.94	R-237503.26	-20.04%
R1580000	R30335.95	R-14735.95	R-176831.36	-11.19%
R1975000	R25279.96	R-9679.96	R-116159.47	-5.88%
R2370000	R20223.96	R-4623.96	R-55487.58	-2.34%
R2765000	R15167.97	R432.03	R5184.32	0.19%
R3160000	R10111.98	R5488.02	R65856.21	2.08%
R3555000	R5055.99	R10544.01	R126528.11	3.56%
R3950000	R0.00	R15600.00	R187200.00	4.74%

A 4.74% return if you plonk down the entire asking price. Again a 70% downpayment is needed just to break even on the rental. The returns calculated here does not take into account rates, maintenance and vacancy and with this being a student house I bet the maintenance costs are a lot higher than what you could expect in a single tenant rental.

Rent Vs Buy: Plumstead

Here's a 1 bed 'starter' apartment in Plumstead ('the suburb car thieves drive through without stopping' as a stand up comedian once said) on sale for R429 000 with a net rental of R2 005 (R2 500 - R495 in levies/rates). If you took out a 100% bond the difference between the bond payments and rent is nearly double the rent. At least we're not in De Waterkant territory here. Here's the payments and ROI you can expect:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R5491.19	R-3486.19	R-41834.29
R42900	R4942.07	R-2937.07	R-35244.86	-82.16%
R85800	R4392.95	R-2387.95	R-28655.43	-33.40%
R128700	R3843.83	R-1838.83	R-22066.00	-17.15%
R171600	R3294.71	R-1289.71	R-15476.57	-9.02%
R214500	R2745.60	R-740.60	R-8887.14	-4.14%
R257400	R2196.48	R-191.48	R-2297.71	-0.89%
R300300	R1647.36	R357.64	R4291.71	1.43%
R343200	R1098.24	R906.76	R10881.14	3.17%
R386100	R549.12	R1455.88	R17470.57	4.52%
R429000	R0.00	R2005.00	R24060.00	5.61%

70% downpayment to break even on cash flow and 5.6% maximum possible returns if you buy it for cash. Returns will be even less once selling costs (estimated by the seller to be an additional R15 000) is taken into account.

Wasn't the sub-500K market supposed to be where all the money is made these days?

Rent Vs Buy: Stellenbosch - I Was Mistaken It Is Pretty Bad

In the previous entry I stated that rent/bond ratios in Stellenbosch are bad but they're not as bad as some that you would find in Cape Town itself. Reader BG was quick to email and point me to this ad for a 4 bedroomed house in Stellenbosch selling for R2 685 000 and that rents for R6 000. Ouch. This is going to get ugly.

On a 100% bond the difference between the bond and the rent is 4.7 times the bond. Here's the payments and return on investment you can expect.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R34367.94	R-28367.94	R-340415.28
R268500	R30931.15	R-24931.15	R-299173.75	-111.42%
R537000	R27494.35	R-21494.35	R-257932.22	-48.03%
R805500	R24057.56	R-18057.56	R-216690.70	-26.90%
R1074000	R20620.76	R-14620.76	R-175449.17	-16.34%
R1342500	R17183.97	R-11183.97	R-134207.64	-10.00%
R1611000	R13747.18	R-7747.18	R-92966.11	-5.77%
R1879500	R10310.38	R-4310.38	R-51724.58	-2.75%
R2148000	R6873.59	R-873.59	R-10483.06	-0.49%
R2416500	R3436.79	R2563.21	R30758.47	1.27%
R2685000	R0.00	R6000.00	R72000.00	2.68%

90% dowpayment required to break even on cashflow and if you pay full price you can expect a dismal 2.68% ROI, a whopping 6% below inflation. In fact in reality once rates, maintenance and vacancy costs are taken into account you can expect that 2.68% yield to fall below 2% if not further.

And then there's this little snippet from the ad: "This oldish house situated on a large lot is a renovators dream". So you're going to have to pour even more money into it over and above the asking price.

Rent Vs Buy: Stellenbosch

This is a bit out of Cape Town's city limits but it just goes to show that terrible rent/bond ratios are not limited only to the city. Here's a 3 bed/2 bath house in Stellenbosch for sale for R1 195 000 with a current rental of R5 000. On a 100% bond the difference between the bond and rent is only double the rental, not as bad as some of the previous examples we've seen in Cape Town proper.

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R15295.97	R-10295.97	R-123551.68
R119500	R13766.38	R-8766.38	R-105196.51	-88.03%
R239000	R12236.78	R-7236.78	R-86841.34	-36.34%
R358500	R10707.18	R-5707.18	R-68486.18	-19.10%
R478000	R9177.58	R-4177.58	R-50131.01	-10.49%
R597500	R7647.99	R-2647.99	R-31775.84	-5.32%
R717000	R6118.39	R-1118.39	R-13420.67	-1.87%
R836500	R4588.79	R411.21	R4934.50	0.59%
R956000	R3059.19	R1940.81	R23289.66	2.44%
R1075500	R1529.60	R3470.40	R41644.83	3.87%
R1195000	R0.00	R5000.00	R60000.00	5.02%

I wouldn't exactly call 5% return on investment (which is below inflation) a "Great investment opportunity". A 70% downpayment is required to break even on cashflow alone. We also haven't taken into account rates, maintenance and vacancy costs. This house is in a security estate and that usually bumps the levies up higher than normal.

Century City Asking Prices: Down And Up And Down Again

We first spotlighted this 1 bed Century City flat waaay back in September 2007. Back then it was going for R799 000 and had a net rental of R1843 a month (R3 000 - R1 156 in rates/levies), a horrendous 2.2% ROI if you bought it in cash. Then in November 2007 the price dropped to R780 000 and the rent climbed to R3 500 a month. Then in January 2008 the price jumped back up to R800 000. Now it's back down to R780 000 again. Here is the return on investment you could expect:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R9983.98	R-7639.98	R-91679.79
R78000	R8985.58	R-6641.58	R-79699.01	-102.18%
R156000	R7987.19	R-5643.19	R-67718.23	-43.41%
R234000	R6988.79	R-4644.79	R-55737.45	-23.82%
R312000	R5990.39	R-3646.39	R-43756.67	-14.02%
R390000	R4991.99	R-2647.99	R-31775.90	-8.15%
R468000	R3993.59	R-1649.59	R-19795.12	-4.23%
R546000	R2995.19	R-651.19	R-7814.34	-1.43%
R624000	R1996.80	R347.20	R4166.44	0.67%
R702000	R998.40	R1345.60	R16147.22	2.30%
R780000	R0.00	R2344.00	R28128.00	3.61%

3.61% when you buy in cash with an 80% deposit required to break even on cash flow. I think some houses in De Waterkant have better yields.

Property Growth For Last Three Months: 0%

Business Day reports that for the third straight month property price growth has been a big fat 0%. South Africans now have a household debt to disposable income of 77.4%!

“We anticipate growth in residential property could be noticeably lower this year than the 8,3% annual growth recorded last year,” Standard Bank said.

Well if it carries on like it currently is going how about a growth of about 8.3% less than last year?

Rent Vs Buy: Mutal Heights - Cape Town CBD - They're Kidding Right?

This has to be one of the biggest indicators that the link between rents and property prices are completely out of whack. Here is a 2 bedroomed apartment in Mutual Heights in the Cape Town CBD on the market for R2 395 000. It manages to attain a net rental of R4 200 a month (R6 000 - R1 800 in levies). A 100% bond will cost you R30 655 a month, nearly R26 000 more than what you could rent it for. The difference between the attainable rent and bond payments is greater than five times than the rental itself! You already can see the ROI and payments are going to be dismal so here goes:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R30655.95	R-26455.95	R-317471.36
R239500	R27590.35	R-23390.35	R-280684.22	-117.20%
R479000	R24524.76	R-20324.76	R-243897.09	-50.92%
R718500	R21459.16	R-17259.16	R-207109.95	-28.83%
R958000	R18393.57	R-14193.57	R-170322.81	-17.78%
R1197500	R15327.97	R-11127.97	R-133535.68	-11.15%
R1437000	R12262.38	R-8062.38	R-96748.54	-6.73%
R1676500	R9196.78	R-4996.78	R-59961.41	-3.58%
R1916000	R6131.19	R-1931.19	R-23174.27	-1.21%
R2155500	R3065.59	R1134.41	R13612.86	0.63%
R2395000	R0.00	R4200.00	R50400.00	2.10%

OUCH! 2.10% return on investment when you buy it for cash and that's before maintenance and vacancy costs. I think this is one of the worst ROIs I've seen before those costs are taken out. Once they are taken into account you'll be lucky to have a ROI above 1.5%. A 90% deposit, about R2 155 000, is needed just to break even on cashflow.

Who in their right mind would pay R30 000 a month when you could rent it for R6 000?

Rent Vs Buy: Tamboerskloof - Another Terrible Return On Investment

Here's a 3 bedroomed cottage in Tamboerskloof for sale for R2 425 000 which has a net rental income of R7 370 a month (R8 200 rental - R830 rates). The payment on a 100% bond is a whopping R31 309 a month, R23 000 more than what you can expect to pay to rent the place! You can already tell the return on investment is going to be terrible so here goes:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R31039.95	R-23669.95	R-284039.35
R242500	R27935.95	R-20565.95	R-246791.42	-101.77%
R485000	R24831.96	R-17461.96	R-209543.48	-43.20%
R727500	R21727.96	R-14357.96	R-172295.55	-23.68%
R970000	R18623.97	R-11253.97	R-135047.61	-13.92%
R1212500	R15519.97	R-8149.97	R-97799.68	-8.07%
R1455000	R12415.98	R-5045.98	R-60551.74	-4.16%
R1697500	R9311.98	R-1941.98	R-23303.81	-1.37%
R1940000	R6207.99	R1162.01	R13944.13	0.72%
R2182500	R3103.99	R4266.01	R51192.06	2.35%
R2425000	R0.00	R7370.00	R88440.00	3.65%

You can expect to earn 3.65% return on investment if you buy the place for cash, nearly 6% less than what you'd earn if you just left your money in the bank. To just break even on cashflow from the rental you need to put down a massive 80% deposit, nearly R2 000 000! The actual yield is probably less once maintenance and vacancy costs are taken into account as well.

Rent Vs Buy: The Square - And The Race Is On!

Here's a bachelor flat for sale in the Square in Buitankant Street for R625 000 with a rental income of R2800. If you buy it with a full bond your payments will be R5 200 more than what the rental can achieve. Here's the return on investment and payments you can expect:

Down Payment	Monthly Payment	Cash flow	Annual Income	ROI
R0	R7999.99	R-5199.99	R-62399.83
R62500	R7199.99	R-4399.99	R-52799.85	-84.48%
R125000	R6399.99	R-3599.99	R-43199.87	-34.56%
R187500	R5599.99	R-2799.99	R-33599.88	-17.92%
R250000	R4799.99	R-1999.99	R-23999.90	-9.60%
R312500	R3999.99	R-1199.99	R-14399.92	-4.61%
R375000	R3199.99	R-399.99	R-4799.93	-1.28%
R437500	R2400.00	R400.00	R4800.05	1.10%
R500000	R1600.00	R1200.00	R14400.03	2.88%
R562500	R800.00	R2000.00	R24000.02	4.27%
R625000	R0.00	R2800.00	R33600.00	5.38%

Sub 6% ROI with a 70% downpayment needed just to break even on cashflow. Not exactly the most scintillating investment is it?

Now here's where it gets interesting. Back in December 2007 we spotlighted another bachelor flat in The Square for R635 000 with a rental of R3 300 a month, which had actually been on sale since May 2007 with an initial selling price of R570 000, which is still on sale today nearly a year later. Now add to it another bachelor flat for a similar price in the same block (although slightly bigger but with a worse rent) and I wonder how long it will take to sell either. The race (to the bottom) is on!