The Maths of Investing in Property
Category Newsletter
The main attraction of investing in property as opposed to other types of growth asset such as listed shares is that you can get part of the purchase price financed. Then, if there is any increase in the value of the property over time, the actual return on the capital you invested can be multiplied – a concept that is known as leveraging.
For example, say you buy a property for R400 000 with a deposit of R40 000 and get a bond from the bank for R360 000. Assuming that the property’s value increases in the first year by 5%, this brings the value of your investment to R420 000.
If we assume that your rental income over the year was equal to the total expenses (bond repayments, maintenance costs, rates and levy), then your initial investment of R40 000 would have increased in value to R60 000; which is a 50% annual return. Thus, through leveraging, a modest increase in value of 5% for the property meant that you earned a very healthy 50% return on your money.
Of course, we are making some significant assumptions:
-
That the annual expenses are equal to the total rental receipts
-
That there were no initial costs (like transfer fees)
-
That taxes (interest deductions or income tax on profits) are not being calculated
Shares that are listed on the JSE, property is not a freely tradable asset so there are substantial costs involved in buying and selling, and changes of ownership take months rather than milliseconds. For this reason property is best considered a long-term investment, with increases in value accruing from both increases in price and rental income.
Over the long-term, property prices generally increase in step with inflation, and often do a lot better. At the same time, the real value of the remaining bond is being reduced by inflation. This means that a well-cared-for property investments should at the very least retain its value over time.
Author: Private Property
