Why I first got involved in property investment

by Johannes Maree


Trading Trust

Being an accountant by profession, I always look at investments from a risk / reward point of view - the higher the risk, the higher the return required. Investment 101, not so? Shortly after reading Rich Dad, Poor Dad by Robert Kiyosaki for the first time, I sat down and drew up an Excel spreadsheet with a few basic assumptions, much like the example I will set out below.

The sceptics are quick to point out at that real estate is historically not your best performing asset class, compared to the stock market, for example. Perhaps that is true (the JSE All Share Index showed growth of 10% on average per annum over the past 17 years), if you look at only one piece of the puzzle. If you look at the whole picture, it changes the scenario significantly - why is that? Because when you only look at the underlying asset, instead of the whole transaction, including the financing element, you're missing the bigger picture completely.

Let me ask you this question: Will the bank lend you money to buy shares on the stock market? That's easy - NO, not in a 100 years! Will the bank lend you money to purchase an investment property? Very likely, yes… That further poses the question: What do the banks deem to be the riskier asset class if they're willing to accept the one as loan security and not the other?

The analysis I did is based on a fairly average, run-of-the-mill, rental property over a 20 year period:

DEAL

   

PURCHASE PRICE

700 000

 

INTEREST RATE

10.25%

 

LOAN TO VALUE

80%

 

LOAN PERIOD

20

 
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