Buy to Rent
By Neil Vorster
When investing in buy to rent properties, there are two terms that are essential to understand. These are Capital Growth and Return on Investment. These are much misrepresented, but once understood make investing in residential buy to rent property an obvious choice for the wise investor.
1. Capital Growth
The real power of investing in property is found in the capital growth. Ask anybody who sold a good property 5 or 10 years ago and they will probably be embarrassed to tell you how much they sold it for – that’s capital growth!
For example, if you bought a little townhouse in Sandton 10 years ago, you probably paid R250 000 for it and it would be worth a million now. That’s growth of 400% (multiplied 4 times) in ten years. Now consider that you financed it with a 90% bond and your rental covered the bond repayments from the start. You therefore invested 10% of the purchase price (only R 25 000)
Where does that leave you? You invested R 25 000 and if you sold it today for R 1 000 000 (after commissions), that would leave you with a profit of R750 000 after ten years.
From an investment of only R 25 000, and capital growth of 400% you would have earned R 750 000 over the ten year period!
That’s the power of capital growth with a capital P.
2. Return on Investment
The next term you will hear often is Return on Investment (ROI). Investors like to work out the initial return on investment, or the return on investment in year one. Property is often misrepresented by well-meaning analysts and economist who often quote this term incorrectly and therefore prevent investors from entering the residential investment market.
When these experts publish their figures of return on investment in an asset class, without fail they make a fatal assumption. They assume that the investor paid cash for his townhouse. Who would pay cash for their buy to let property, when the banks are more than willing to pay for most, if not all, of your purchase price?
Let me show you how to work out your ROI, (the buy to let investor method), when considering an investment in a townhouse.
I will use an example of a Johannesburg northern suburbs townhouse purchased by one of our Organic Growth Investor Club members earlier this month (April 2013)
By Definition, return on investment equals RETURN divided by INVESTMENT, expressed as a percentage.
Our investor should be very happy with this one, he can comfortably expect a Return on Investment in excess of 100% in the next twelve months.
I hope that these definitions make sense and help you to find your way through all the jargon, while inspiring you to invest in buy to rent residential property.
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