This one mistake will cost you everything!
Who likes to spend hours analysing numbers?
Kudos to you if the answer was yes. It certainly wasn’t my favourite pastime…until I realised that the trick behind being a successful property investor is the ability to run the numbers to determine if a property will put money into your pocket or take money out of your pocket.
This has never been more crucial, interest rates are rising, petrol and diesel prices are through the roof and have you noticed how much a trolley of basic groceries costs lately!? I am even starting to avoid eye contact with Woolies.
Let’s look at an example of the impact of interest rate hikes on your bond repayments. Let’s say you own a beautiful little buy to let with a bond of R1 050 000.00.
When the world went mad (aka covid) the interest rates dropped significantly. People rushed out and bought property like ice cream on a hot summer day.
In December 2021, the interest rate was sitting at 7.25%. Then the dark clouds of reality rolled in and by January 2022, the interest rate was up to 7.50%.
Let’s have a look at what that means to your back pocket:
Month | Interest Rate | Monthly Repayment |
January | 7.50% | R8,546.71 |
February | 7.75% | R8,667.00 |
May | 8.25% | R9,038.78 |
July | 9% | R9,415.97 |
That’s an extra R869.26 out of your pocket every month in just seven months for bond repayments only! And another interest rate hike is on the cards for this month!
AAARGH!!
Just before you faint and go back to buying lottery tickets as your primary investment strategy, take a deep breath and read on to see how to weather the storm brewing in the property market.
It’s all about the numbers.
What puts money IN your pocket?
Gross rent
What takes money OUT of your pocket?
Bond repayments
Insurance
Rates and taxes
Levies
Operating expenses
Management fees
Maintenance
etc.
Here is an example of what that might look like if you were to buy a property in a complex which generally means you’d be paying levies (a fee paid towards the general upkeep of the complex):
JANUARY 2022 | |
|---|---|
INCOME | |
R13,000 | gross rental income |
LESS EXPENSES | |
R8,546.71 | monthly bond repayment in Jan |
R300 | insurance |
R700 | rates and taxes |
R500 | levies |
R1,100 | operating costs (10% of gross rental income) |
R1,100 | management fee (10% of gross rental income) |
TOTAL PROFIT OR LOSS | |
R753.29 | Profit |
JULY 2022 | |
INCOME | |
R13,000 | gross rental income |
LESS EXPENSES | |
R9,415.97 | monthly bond repayment in Jul |
R300 | insurance |
R700 | rates and taxes |
R500 | levies |
R1,100 | operating costs (10% of gross rental income) |
R1,100 | management fee (10% of gross rental income) |
TOTAL PROFIT OR LOSS | |
R115.97 | Loss |
The big mistake most people make is not to factor in operating costs or management fees, opting to pocket the cash instead. In my example, by July, they would still not be making a loss BUT if anything goes wrong, and it probably will (because properties need maintenance, tenants are facing difficult financial challenges etc), they won’t have any savings or buffer to help carry them through.
On the other hand, if you had factored the additional buffer of R2200 (operating costs + management fee) into your calculations, you’d easily be able to weather these turbulent times.
It’s easy when you know how!
For more tips and tricks, grab your signed copy of my latest book, Bricks for Chicks here.
