How to determine your return on an investment home (ROI)

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Owning properties can provide investors with steady rental income or capital appreciation when the property is sold for a profit. However, it is important to measure the return on investment (ROI) to determine the level of profitability of the property.

 

Before investing in a rental property, there are a number of key factors to take into account explains Craig Hutchison, CEO of Engel & Völkers Southern Africa. “Location and the future of the location is the first and foremost aspect to consider when purchasing an investment property that will result in capital appreciation. The next features to take stock of are fixtures and fittings. Are they durable and will you have high maintenance costs?”

 

“Thirdly,” says Hutchison, “establish if there is a demand for a particular property. Do your homework on the area and the types of properties that are in demand. It makes more strategic sense to invest in a two-bedroom unit instead of a three-bedroom house, if the demand for the former is greater.”

 

Lastly, Hutchison recommends that buyers look at a five-year view to invest as a minimum time frame. Ten years is preferable as this will generate a more valuable return on investment, as this should give the best capital appreciation on a well located and maintained property.

 

Below is an outline of how to calculate ROI:

Cash Purchase

  • If an individual purchases a property outright with no bond, the profitability or ROI is calculated as follows:
  • If a property costs R1 million and the transfer costs (conveyancing fees, transfer duty, deeds office fee and V.A.T.) are R30 000, the total investment is R1,03 million
  • Rent collection every month is R10 000.

 

In 12 months’ time as an example:

  • R120 000 in rental income is earned
  • However, there are expenses including maintenance, property taxes, levies and insurance which could total R24 000 per year or R2 000 every month.
  • The annual return is R96 000 (R120 000 – R24 000) for the year
  • The capital appreciation of the property after selling costs has increased by 3% equaling R30 900 (R1 060 900 – R1 030 000)

 

To calculate the property’s ROI:

  • Divide the annual return (R96 000 + R30 900 = R126 900) by the amount of the total investment (R1, 03 million)
  • ROI = R126 900 ÷ R1,03 million = 0.123 or 12.3%
  • ROI is 12.3%

If the property is bonded, the profitability is worked out as follows:

  • On the same property for R1 million there will be added costs, including conveyancing fees, bond initiation costs, deeds office fee and V.A.T.
  • In addition to these costs, buyers should also make provision for additional charges, which can include rates and clearance certificates and prospective taxes amongst others. These costs amount to R30 000 resulting in the total cost being R1,03 million
  • A down payment of R230 000 is made and the remaining R800 000 is bonded on a 20-year loan with a fixed interest rate of 10%
  • The monthly principal and interest payment would be R7 17
  • Add R2 000 per month to cover maintenance, property taxes, levies and insurance, which equals R9 17 in expenses every month
  • With a rental income of R10 000 the owner would make R279.83 each month (rent minus bond repayment)

 

One year later:

  • The investor earns R120 000 in total rental income for the year at R10 000 per month.
  • The annual return is R3,357.96 (R279.83 x 12 months)
  • The capital appreciation of the property after selling costs has increased by 3%  R30 900 (1 060 900 – 1 030 000)

 

To calculate the property’s ROI:

  • Divide the annual return by the original out-of-pocket expenses (the down payment of R230 000) to determine the ROI.
  • ROI: (R3,357.96 + R30 900) ÷ R230 000 = 0.15
  • The ROI is 15%

 

Things to Consider

As demonstrated in the examples above, the ROI for a rental property is different depending on whether the property is financed via a home loan or paid for in cash. It is also important to bear in mind certain variables such as if the property is vacant and there is no rental income for a number of months or maintenance costs are higher than anticipated.

Which type of wood should you use for your braai?

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In South Africa braaing is more of a religion than a mere pastime. Firing up the perfect coals and grilling the most flavourful meat is not just an activity; it’s something of an art form. “Braaing is in every South Africans blood, there’s just something about grilling meat outdoors that appeals to everyone, regardless of their economic status, race or cultural background.

 

Be it for a birthday, Christmas, farewell, welcome home, or simply to get a few friends together, any occasion is an acceptable reason to light the fire, and any day is a good braai day – there are few things we love as much; it is all about the experience, the company and the quality of the food.

 

With the warmer months finally upon us, many might be in the market for a new braai and it is worth-while to consider all the options before you buy. We look at the fuel and the apparatus’ available for the perfect braai to help you make an informed decision:

 

Wood or Charcoal?

 

Wood was formerly the most widely-used braai fuel, however with our busy schedules these days the use of charcoal has increased due to its convenience. We have 3 options available to us to get that fire going; wood, charcoal (carbonised wood) and briquettes (charcoal residue that’s been compressed into shapes). What you use will depend on the occasion and how much time you have.

 

Undoubtedly the best braai is with wood, there is no comparison to the flavour of your meat and it is great for a lengthy social get-together. When food is grilled over wood, a compound called Guaiacol is released, this is the smoky spicy aroma compound produced when you use heat to break down lignin, which gets infused in the meat. The wood smoke goes into the meat or pot, giving it that unique flavour, which you can never get from charcoal or gas. For this reason we still remain fans of the classic wood fire.

 

We are reliant on fire as both a heat source in winter, and for entertainment. Different trees provide us with wood, with different qualities that contribute to the fire. It is the density and moisture content that determines its favourability; some types have too much moisture or are too dense and do not burn in a satisfactory manner.

 

Wood should have been given at least a year in which to dry out, leaving it with less than 20% moisture content. Hardwoods are very dense; they have more potential heat energy per volume of firewood. Therefore they tend to be the best firewood types for heat and for cooking. However, they are more difficult to get ignited, usually cost more, and take longer to dry than softwood.

 

For every wood-burning braai enthusiast out there, you’ll find someone who’s every bit as passionate about using charcoal. Charcoal is great for a fast, convenient braai as its easy-to-use and lights very quickly. Briquettes is the best option to use in a kettle braai, because they can be used in small amounts and retain heat for longer than charcoal pieces.

 

In the end it all depends on your requirements. Wood for “geseligheid” with friends till the coals are ready, and charcoal when braaing for the family and you need to get it done quickly. So go ahead and stand behind whichever method you prefer – the choice is yours.

 

Popular wood options:

  • Sekelbos – Is very popular, extremely dry and hardy. Commonly found throughout the country, and is, without a doubt, the best to use as it gives off intense heat, burns incredibly long, and also imparts a lovely smoky flavour to the meat.
  • Black Wattle – Easy to light, lasts extremely long, and provides that glowing coal. It is a bit harder to find and will be a little more expensive than Blue Gum.
  • Blue Gum – Not endemic to South Africa and it is often a little wet. The resin also makes it burn out faster than the Black Wattle.
  • Mopane – Indigenous to SA, and is the braai king next to the Sekelbos. Is very dry and hardy, and makes extremely hot coals in very little time, and stays hot for a very long time.
  • Kameeldoring – Has the lowest moisture content, is extremely dry and heavy. It takes long to burn out and creates a large amount of hot burning coals. Almost smokeless and has a natural musky fragrance.
  • Rooikrans– Very popular in the Western Cape; It usually comes in log shapes and is also a great hardwood for a braai.
  • Apple wood – Difficult to come by, but is a great source of firewood. It is ideal for a pizza oven or for smoking. It has its own sweet aroma that is known to flavour the food.

Wood density

Heavier, more dense wood, is ideal wood for a slower braai, especially if you are not in a hurry to get the fire going and want to enjoy fire making and a few cold ones while doing so.

Hard wood burns at a higher temperature for longer, this is partly due to the fact that the longer wood burns for the hotter it gets. Hard/dense wood will also leave ample time to cook and to restart the fire at a later stage in case someone arrives a little late.

Dense wood is it is usually more expensive and hard to get at times but in the end because it burns for longer, you will use less and it’ll probably work out to be the same amount of money but with a better outcome. Use soft wood for a camp fire where it can burn out quick after you’re done and it makes for a great high flame bonfire.

How does the lower interest rate impact my property purchase?

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The 300 basis point decrease in the repo rate this year came as pleasant surprise to all consumers and to the economy of South Africa. It shows the intention of the Government and the Reserve Bank to assist consumers and protect the fragile economy of South Africa in the current circumstances. Good leadership together with a will to make the hard decisions is what will get South Africa through. The question is, what affect will this latest interest rate cut have on the economy and especially the property market?

For the first time, the repo rate been cut to a record low of 3.5 %, which has brought the prime lending rate down to 7%, and indications are, looking at global and local markets, that the interest rates are going to be at these levels for the foreseeable future. This is the lowest our interest rates in South Africa has been since the 1950’s.

 

What does this mean to buyers & Investors:

For new home buyers wanting to climb onto the property ladder or investors looking to expand their portfolios, this could not be better time. This is the cheapest it has been in decades when taking into account the interest rate together with property prices.

This may well be a once in a lifetime “black swan event”, so for first time buyers or investors, it is definitely an opportunity to rewrite your future in wealth.

 

What does this mean in rands & cents?

If you had bought a property of R1 million prior to the cut, your repayment would have been R9485 per month. At the current rate, that same property will cost you R7753. This means a monthly saving of R1732 and over R400 000 over the 20 year period of your homeloan. You would also have had to earn R31 617 to qualify, where as now you only need to earn an income of R 25 843.

 

Will COVID not have a negative impact on my investment?

Coming out of the COVID epedemic will surely mean the economies of the world will rebound. Some quicker and more vigorously than others, but property remains the backbone of any economy. Although the South African market is expected to have a slower recovery due to the structural challenges that we had going into the lockdown, especially on the affordable accommodation side, as it is always in the highest demand.

 

Buying a unit at Stanley Park:

Stanley Park falls under the ‘affordable accommodation’ category with units below the R1,5 million mark & even if you need to upscale, downscale or re-locate – it will generate a Gross income yield of 9-10%, that is without taking into account the increase in property value over time adding to your return on investment. As sales in the complex has not been available to the public for very long,  you have a unique opportunity for early buy-in.

Units at Stanley Park come with additional benefits such as free appliances, low levies & reduced bond & transfer fees of only R19 000 – giving you savings close to R35 000 depending on your unit of choice.

 

What do I need to qualify?

The below table sets out the various unit options outlining the savings thanks to the interest rate cut as well as expected rental & income qualifying criteria. For more information, chat to our team or apply for a free, no obligation pre-approval certificate from our in-house finance team.