Purchase a 2nd Property or to Wait - Durban, South Africa

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Purchase a 2nd Property or to Wait - Durban, South Africa

Account Closed
Real Estate Investor · Durban, KZN · Member since 2014 · 10 posts · 0 votes

Hi there,

I have no doubt that this is a silly question, and I have already an idea of what the answer is, but I thought I would ask for some advice from experienced real estate investors.

I am 4 months into owning my first investment property which has increased by 40% in value due to me having bought the property off-plan a year ago and the low interest rates in South Africa which have helped the properties in Durban increase significantly.

I am now looking to refinance my property and then add an addition amount that would allow me to put down a substantial deposit on a second investment property.

The rental from my current property exceeds the monthly costs and produces a profit of around 10% of the rental income. If the tenant in this property were to cancel their lease, I would be able to cover the expenses myself from my salary.

Being 28 and open to the ideas of taking more risk than someone more mature than myself, would you advise that I purchase a second property similar to the one I currently own, or go for a smaller property? 

I would be able to cover the costs of 1 property, but if both had similar monthly costs, and both sat untenanted for an extended period, I would quickly find myself in a pickle, financially.

Any advice of comments would be greatly appreciated.

Regards,

Ben

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Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
11y

Ben,

Welcome to BP!

While I'm 20yrs your senior, I'm not certain I qualify for the more mature label - definitely not if you were to ask my wife.

In reading your post above, it would appear the significant short-term appreciation your property has experienced is a result of a frothy real estate market, rather than having acquired the property at a steep discount and/or forcing appreciation through improvement of the property. 

While such an increase in value is a lucky windfall that brings a smile to your face, I'm always cognizant of the fact the head can come off the market and some of the appreciation given back to the ether from whence it came.    In your shoes ... well, I'd not be contending with 1.5m of snow, but that's another story...  Assuming your property will appraise at, or near, these lofty new market valuations, I would most definitely look into pulling some of the newfound equity back out of your property but I would not put myself too close to the edge - you want to be mindful of the increased debt servicing payments that will come with a larger mortgage on the property.  Here we can only refinance to 75% of appraised value, which builds in some buffer.

With respect to funding your properties out of pocket, I'd advise against settling on that as a strategy.  If you say the present property is turning a 10% return (after expenses and debt service ... or after taxes?), I would direct that 10% cash-flow into a reserve fund until it as accumulated to the point where you could carry the property vacant for 6-12 months.

Once you have your reserves built and the property refinanced, it would be a good time to take on a second one.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    11y

    Ben,

    Welcome to BP!

    While I'm 20yrs your senior, I'm not certain I qualify for the more mature label - definitely not if you were to ask my wife.

    In reading your post above, it would appear the significant short-term appreciation your property has experienced is a result of a frothy real estate market, rather than having acquired the property at a steep discount and/or forcing appreciation through improvement of the property. 

    While such an increase in value is a lucky windfall that brings a smile to your face, I'm always cognizant of the fact the head can come off the market and some of the appreciation given back to the ether from whence it came.    In your shoes ... well, I'd not be contending with 1.5m of snow, but that's another story...  Assuming your property will appraise at, or near, these lofty new market valuations, I would most definitely look into pulling some of the newfound equity back out of your property but I would not put myself too close to the edge - you want to be mindful of the increased debt servicing payments that will come with a larger mortgage on the property.  Here we can only refinance to 75% of appraised value, which builds in some buffer.

    With respect to funding your properties out of pocket, I'd advise against settling on that as a strategy.  If you say the present property is turning a 10% return (after expenses and debt service ... or after taxes?), I would direct that 10% cash-flow into a reserve fund until it as accumulated to the point where you could carry the property vacant for 6-12 months.

    Once you have your reserves built and the property refinanced, it would be a good time to take on a second one.

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  • Account Closed
    OP
    Real Estate Investor · Durban, KZN · Member since 2014 · 10 posts · 0 votes
    11y

    Firstly, awesome profile pic there Roy! I too highly doubt you would fall into the "mature" label.

    Thank you for your response and the valuable point of view.

    I am just sitting with a dangerous amount of money to put somewhere, i.e. a deposit on a second property, but my monthly income is not enough to cover two bonds plus expenses.

    Appreciate your advice Roy, thanks.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    11y

    Ben:

    You have time on your side and, while calculated risks are good things to take when you are young, you need to learn your line between risk and reckless.

    I have plans to be headed back your way in 2 or 4 years - once the boy is a little older - to have a go at the uphill run.

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  • Account Closed
    OP
    Real Estate Investor · Durban, KZN · Member since 2014 · 10 posts · 0 votes
    11y

    Haha. I have done Ironman. I've done 100km trail runs in the mountains of the Drakensberg. Last year I got to the top of Cowies Hill on a down run with 3 hours and 14km to go and passed out cold... Toughest thing I've ever done. Let me know when you're in town, would be cool to meet up. Hopefully I will have "cautiously" grown a property portfolio to show you.

    Thanks again for the advice.

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  • Matthew Hallgren
    Investor · Durban, Kwa-Zulu Natal · Member since 2015 · 9 posts · 2 votes
    10y

    Ben, did you purchase that second property? 

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  • Account Closed
    OP
    Real Estate Investor · Durban, KZN · Member since 2014 · 10 posts · 0 votes
    10y

    Hey Matthew,

    Nope, haven't purchased a new property yet. Been to a couple sales events and sheriff auctions, but haven't found anything worth investing in. Also have been put off making any further investments in SA with the way our government is behaving.

    How about yourself? How is you property in town going?

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  • Matthew Hallgren
    Investor · Durban, Kwa-Zulu Natal · Member since 2015 · 9 posts · 2 votes
    10y

    Ben, my property is doing well, haven't had any trouble, am busy with a second at the moment.

    0Reply
  • Calvin Howell
    Durban Kwazulu-Natal, South Africa · Member since 2019 · 5 posts · 2 votes
    7y

    Hey @Matthew Hallgren & @Account Closed I realize this is an old thread but thought I would still inquire how both your portfolios are doing ? With the current state and the ever looming "Land Re distributions" i have seen some scary price drops even in the more "Larnie" places like Cotswold Downs Estate herein Hillcrest. Interested in your feedback's and hope I don't come off as too doom and gloom in my question!

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