The Blue Roof

INVESTMENT OPPORTUNITY

Retirement Village unit selling for R495 000 and a rental of R6 000 per month. At 12% interest it will cost you (out of your pocket) R950 per month and after 4 years you will start making a profit.

  If you are interested in this excellent opportunity – pietm3@yahoo.com is the answer to all your info.

 The other person who responded to benchmarking your wealth, does not agree with my basic premise.

 Now what can I say?

 The advert above is real, if you act quickly you can buy this unit. And I will use this as an example to “proof” my case.

 Let’s assume you buy this property with a 100% bond. Then you owe R495 000 and you have an asset of R495 000. Your income is R6 000 per month. After paying expenses (levies and management) you need R1 000 to pay the bond.

 Now assume there is no capital growth in the property (not very realistic, but I want to simplify things). And assume the rent increases by inflation every year. Very realistic. Further, with the increasing rent, your contribution to the bond will decrease over time, right? Which means that in time you will start making a profit which, if you are wise, you will utilise to repay the bond.

 Let us further assume that your contribution will be R1 000 per month for 4 years (R48 000). Obviously this is wrong, but let’s keep it simple. After 4 years you start making a profit. And within 15 years you have settled the bond.

 What is the result of all this? For R48 000 you bought an asset of R495 000. That is not bad in anybody’s book.

 But the best part is this: for R48 000 you bought an income stream of R6 000 per month, increasing by inflation, for life! And that is what it is about!

 Now consider the alternative.

 I don’t know how much you have to save EVERY month for your whole working career to have an income of R6 000 per month growing by inflation. And keep in mind my rental R6 000 is present value!

 When you retire with the capital you have saved over your working life, you have one of two options:

 

1. You buy an annuity or pension – a monthly income – normally for life. Because the company paying the pension has to be sure that you don’t outlive your capital, the income is not very high and mostly is unchanged for your life. NO increasing by inflation. When you die, the capital goes to the company (this is simplified).

2. You buy a living annuity, which is a relatively new product. It means you invest your money, let’s say R1 000 000 and you take an income of 5% per year. What is supposed to happen, is that investment income and growth should be more than 5% so that your annual income can increase. But what happens when the stock market drops by 50%? Are you going to go without an income until the capital has increased again? If you DO take your 5%, then the capital reduces, so the growth is on less capital. What is more, there is a huge difference between 5% of R1 000 000 and 5% of R500 000!

 

This is very simplified, but look at the above and decide for yourself which option is better.

 And consider that investment opportunity!

 

This entry was posted on Thursday, January 21st, 2010 at 08:29 and is filed under Financial Freedom, Financial Planning, How to Invest in Property, Investments and Investing, Property, Some Retirement Myths, Wealth and Poverty. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.