Rent vs Buy

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Assumptions

  • Rental yield: 5%

Erwin Rode - July 2007 main metropolitan area rental yields 4%-6% range. [1]

  • Cash cost of bond for first 20 years: 13.21%

Monthly cash payment on bond for 240 months, 12% interest rate, 0% residual

  • Rates, levies, maintenance: 3.03%

Apartment examined, R1,100 p.m. levies, est R500 p.m. maintenance, on cost price R650,000

  • General inflation rate: 4.5%

Reserve bank target range 3%-6%

  • Nominal house price growth: 6.0%

Residential property price real returns negative to 1997. [2]

Subsequent rapid increase assumed due to lowering of interest rates and reduction in discount rates, 20 year long-term real growth expected of 1.5% p.a.

  • Nominal rental cost escalation: 7%

1% p.a. real 20 year average catch up to account for dramatically different growth rates between nominal and rental.

  • Real GDP growth: 5%

Target is 6%, should be able to achieve 5%

  • Equity market dividend yield: 3.0%

This creates an expected equity market total return average of 12.5% p.a. Historically, the JSE has returned +-18% pa, but in a higher inflationary environment.

Assume cap rates stay constant, nominal share values should increase at least at inflation + real GDP growth.

Results

Property value examined: R650,000 Additional initial costs: R23,000 [3] Total initial bond amount: R673,000

  • Year 1 cash outflows associated with ownership: R108,623.72

Bond: R88,923.72 Rates, levies, maintenance: R19,700.00

  • Year 1 residual to invest: R76,123.72

Rental cost taken out: R32,500.00

  • Year 21 ownership position:

Cash outflows: rates, levies, maintenance: R47,510.77

Asset value: R2,209,716 After exit cost of 5% (agents comm): R1,980,406

  • Year 21 rental & investment

Rental: R125,764.75 Cash dividends: R133,843.73 Net inflow: R8,078.98

Asset value: R4,673,428.78 After 1% exit fee: R4,626,694.49

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