It’s really great to be part of a community – especially when it’s a community of excellent individuals. While many didn’t love what we had to say in our homeownership podcast, almost all of the feedback was of the intelligent allow-me-to-disagree variety. There wasn’t even a light shanking. I am grateful. We should all hang out.
In this episode we go through all the counter-arguments and feedback. We also answer questions about shorter payback periods and cash purchases. The biggest criticism was failing to account for rental escalation and the inclusion of structural insurance in levies. Many people also pointed out that the situation would look very different if you paid your bond off over a shorter period. These are all excellent points, which I concede.
We shared three calculations below that account for that oversight. I strongly encourage you to use them as a template to run the numbers for your personal situation. I’ve included everybody’s assumptions to account for the differences in values.
My hope is, if nothing else, our views on homeownership will encourage you to question your assumptions about buying a primary property as an investment. Defaulting into huge financial decisions is not a strategy that’s going to get you rich.
This is the Moneyweb article I refer to in this podcast. It’s a good, easy read.
Stealthy has been thinking about this for a long time. He owns two properties and didn’t make the decision lightly. Following his reasoning is worth it for future buyers.
Here are some thoughts from Stealthy, as well as his calculations:
- Your structural insurance should be included in your levies (so I will not factor this in).
- Another advantage about sectional title is a lot of the maintenance is covered by your levies. I estimate sectional title maintenance at 0.5% of the property value per year. I wrote about this here.
- Rental escalation is pretty important – at 10% it will soon catch up and overtake your bond payments and levies. You can then invest the difference in equities.
- I assumed property price growth of 0.6% above inflation, and inflation of 6.2% – a number which I calculated here.
Conrad was among those who pointed out that shorter payback periods would make a huge difference to the calculations. What knocked our socks off was the fact that he paid off his home loan in three years. That is seriously impressive. Congratulations, Conrad!
Here are Conrad’s calculations:
We currently live in a complex where we own the house. We bought it for R1.45m in 2013 (and paid off this month). Currently it sells for R2m and rental (according to Property 24) is R16 500 per month. I assumed that the bond was granted on 0 deposit BUT the payment period is 10 years (not 20). Payments are R26 430 per month at 10% p.a. I’ve also assumed that the renters and buyers both have R32 000 income for houses. I’ve assumed that the growth of the investments is also 10%. Rent increased by 8% p.a. Electricity and water by 0% and that we all get 6% increases every year (added to the R32 000).
Rent: R16 500
Electricity and Water: R1 500
Total = R18 000
Investable income: R14 000
Payment: R26 430
Electricity, water, rates and insurance: R3 900 (This is real life values that I am paying)
Total = R30 330
Investable Income: R1 670
Ok so it looks bad doesn’t it? I agree at first sight I thought: “Oh shit, WTF have i been doing since 2007 when I started working?”.
Year 1: R177 100
Year 2: R379 500
Year 3: R609 851
Year 4: R871 051
Year 5: R1 166 264
Year 10:R3 285 018
Year 1: R21 125
Year 2: R63 718
Year 3: R130 888
Year 4: R226 096
Year 5: R353 185
Year 10:R1 633 490
Eish, HALF the value! BUT here is the kicker. I now have an asset that’s paid off and appreciated in value (unless some crack den opened up there). I assumed a 6% p.a appreciation on the value of the property. At the end of 10 years, my R2m house is now worth R3 581695, bringing my total assets to R5 215 186 compared to the renter’s R3 285 018.
Erwin very kindly ran the numbers in an Excel spreadsheet, which is available here. Why not add your own numbers and see where you end up?
Here are some thoughts from Erwin:
Since the bond stays the same, and rent increases yearly by 10%, the renter will have a larger bill to pay after about year 10. I made the excel invest the difference, and show a final portfolio (house + investment for buyer vs investment only for renter). Buyer will have R13m while renter will have R9m.
I am so humbled by the trouble everybody took to engage us in this. Thanks, everybody. We like you!
P.S. I couldn’t resist the pun in the title. I’m sorry. I have a problem.
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