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!

Phew, I am safely back from a very busy weekend.  Now it is back to making my dream of total financial freedom by Dec 2011 come true.

Last Monday I wrote about the best investment for everybody – investing in your own knowledge and skills.  I also touched on the subject of people complaining about a lack of money.  Whatever you do, it is possible that your income is not big enough to qualify for a suitable bond to buy a decent property.  So let’s consider some options.

When I consult and find a case like this, I immediately ask:  “What does your father, brother(s), sister(s) do?  Would they be interested in property investment?  Or do you have trusted friend or co-worker who would be interested?”  The stock standard answer is something like this:  “I don’t want them to know that I cannot afford it.”  That is why there is a quote drifting around:  Pride will keep you poor.  You would be doing your family a big favour if you get them involved with good property investments.  So do it.

Another option is to take a leave from the books of the South African Black people.  They have a Stokvel.  It means that a group of friends get together each contributing a specific amount of money each period (weekly, monthly) and then each time a different person gets the money.  So imagine 10 people each contributing R100 per week.  It means every 10 weeks you get R1 000.  It is an easy, disciplined way to build capital – it is also how the old Building Societies started.  I am coming back to this idea later.

What about starting a property investment company?  If 10 people each contribute R500 per month, it means R5 000 per month and R60 000 per year.  That is more than enough to start investing in property.

The point is this:  more people can do more and bigger things quicker than an individual.  Don’t be afraid of asking people to buy into your dream.  Just think what you can achieve.

Problems?  Naturally there are problems – I am waiting for you to tell me what problems you see.  And I am convinced there are readers out there who have solutions to offer.  So, let’s get some conversation about this.

Tomorrow we spend more time with Donald Trump.