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Investing in property? Just wait a second before you do so…

by , 05 February 2016

According to Stats SA 36,300 new houses was built in South Africa during 2015.

This has been part of a steady recovery since the 2008 crash.

But before you go out and buy the first best rental property you see first heed my warning…

You need to bring the interest rate risk into your equation

Looking at the vast bulk of property prices today it’s clear to me buyers simply aren’t recognising the fact that interest rates are still near record low’s and could increase substantially from here.

The prime interest rate is still only at 10.25%.

Between 1998 and 2008 the average prime interest rate was 14%.

So interest rates could go up another 3.75% before hitting the average…

Since January 2015 we’re up 1%.

If you’d bought a R500,000 bachelor flat in a popular suburb of Johannesburg last year you’d have started out with a monthly bond payment of R4,600. Add in levies and rates and you’d end up with around R5,600 per month expenses with R4,800 rental income.

Fine, you’d have been cashflow positive with that deal if interest rates stayed at their all time low…

But just a year later and your monthly deficit is now around R1,100.

If interest rates head up to the 1998-2008 average you’ll end up with a monthly deficit of R2,400!

That means, if interest rates revert back to the average seen in the past decade you could end up R28,800 out the money within a year!

You need to build up a cash pile on the side-line…

The fact is, if you’re not making at least R500 a month on a R500,000 property today you’re going to end up in trouble in a year or two’s time.

So rather than buying a property and overpaying, rather s9it on the side-lines a while longer.

Build up a cash pile.

Because I can guarantee you there will be many bargain properties to buy in one year’s time.

Here’s the facts:

Why the property market is about to hand you the bargains of the decade

US debt to disposable income increased from 43% to 62% between 1980’s and the 2000’s.

It was this explosion of debt to income that caused the massive increases in US property prices and also the massive crash in property prices in 2008 when households couldn’t cover these property repayments.
  
Calculate your debt to disposable income ratio now:

Divide your total monthly debt repayments by gross monthly income. For example, John pays R9,000 each month for his home loan, R4,500 for his car loan and R500 for his credit card debt each month. So his total recurring monthly debt equals R14,000. If John’s monthly income (after tax) is R30,000, his disposable income ratio would be R14,000 / R30,000=46%
According to FNB property strategist John Loos South Africans are sitting on a debt to disposable income ratio of 78.3% right now.

So you can decide for yourself. But in my mind it just can’t continue.

With increasing interest rates something’s got to give.

And that’ll be large amounts of home repossessions by banks, when owners can’t pay their monthly bonds.

It’ll be fire sales of properties as owners try to sell them and cover their costs before banks foreclose.

In short I foresee many properties hitting the market, whether by private sales or sheriff auctions in the coming year.

And there’ll be bargains.

All you need to do as a smart property investor is ensure you’re not bogged down by cash burning properties. And that you’ve got some funds available to scoop up these bargains.

Then you’ll be set with a cash generative property portfolio for the next decade…

Here's to unleashing real value,


Francois Joubert
Red Hot Penny Shares Editor,
RedHotPennyShares.co.za

P.S. My How to become a master property investor DVD programme contains a proprietary spreadsheet system I use to ensure I buy properties at the right price. If you’re considering buying a property in the current market I urge you to run the system and evaluate the price you’re paying very closely.

 
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Investing in property? Just wait a second before you do so…
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