Real Estate Investor Magazine South Africa October 2014 | Page 32

FINANCE

BY KOOS DU TOIT

Buy-to-Let ROI

Understanding the real returns

M

any investors make the mistake of basing
their return on investment calculations
for buy-to-let property investment on
nothing more that the capital growth on the value of
the property. For example, if capital growth of 5% was
achieved for the year, then the return of investment
on a R500,000 property would be calculated as: 5%
on R500,000 = R25,000 - certainly not an attractive
return. But this provides a highly skewed picture of the
real returns produced by buy-to-let property!
Calculating the real return
If the returns on a buy-to-let property investment
are correctly calculated, it should take into account
the fact that the investment not only produces capital
growth on the value of the property, but also produces a
monthly income. If the rental for a R500,000 property
is R5,000 per month, the calculation, should look like
this:

Annual capital growth (as calculated above) = R25,000
Annual rental earned @ R5 000 per month = R60,000
Total return
= R85,000
Now the return on investment scenario looks very
different! And of course, next year, these figures will
look even better, because capital growth is compounded
(ie investors earn capital growth on capital growth
already earned). In addition, the rental increases in line
with inflation every year, and is also compounded.
Add the power of gearing
But there is yet another reason why buy-to-let property
investment returns can be nothing short of spectacular:
buy-to-let property allows property investors to gear
their investments. In simple terms, if you buy R500,000
of listed property shares, you need to invest R500,000
in after-tax cash. To acquire a R500,000 incomegenerating residential buy-to-let property, you may
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October 2014 SA Real Estate Investor

obtain a 100% mortgage or home loan, which means
you need no lump sum investment at all or perhaps you
will need, say, a 10% deposit of R50,000.
Of course, if you have a loan, there will be monthly
repayments and these need to be deducted from the
monthly income generated. However, as the monthly
income increases in line with inflation each year but the
bond repayment amount remains static, the monthly
income grows year after year until the bond is paid off.
Investors who follow a tried-and-tested system can pay
off a 20-year bond in as little as eight years, where after
the full rental income – less expenses such as rates and
taxes - goes into the investor’s pocket each month for
as long as the property is owned.
If gearing is taken into account, and your original
out-of-pocket investment was just a R50,000 deposit
to acquire a R500,000 income-generating asset, the
return on investment skyrockets.
Infinite returns
Spectacular as these returns may seem, the truth is
that the longer an investor keeps a property, the higher
the return on investment. In fact, if the property is
acquired in the right trust structure, so that it continues
to produce these returns for generations beyond the
investor’s lifetime, a buy-to-let property can produce
infinite – or immeasurable - returns. Many properties
that are held in trust in long-established property
markets, such as England, have been producing capital
growth and monthly passive income for 300 or 400
years, and the return on investment on these properties,
originally acquired for a pittance in today’s monetary
terms, is indeed infinite.
Calculating the real return on a buy-to-let property,
including the effect of gearing, it just one of the many
crucial factors incorporated into the P3 Property
Wealth Manager software. Download the free demo
version from www.hope.co.za to do your own ROI
calculations.
www.reimag.co.za