Cash-flow from small apartment investments

7 Replies

Hi guys, love the site and all the info/resources/help that is available here.

Short summary of my situation:

- Complete beginner with real estate. Only just starting to learn about what is involved.

- Looking at small (1-2 bed) apartment investments to rent out / let.

- Live in South Africa (Cape Town).

I've been reading about important aspects to look out for with this type of property investment and seen lots of discussions regarding the 1% rule, being cash-flow positive and debates around initial down payment. While trying to get up to speed with all of this, I've also been watching the property market and going out and seeing a few places for sale as well to get an idea of what is out there.

I've done the math with a lot of existing properties (even very cheap properties in less affluent areas) and I just can't see how I can apply those rules in my situation. For instance, take the below examples:

Currency: ZAR (R). Exchange:+- 13.5 ZAR : 1 USD

Prime lending rate: 10.5% (we have relatively high interest rates here)

Mortgage terms: 30 years

E.g. 1

Property price: R795,000 (cheap 2 bed in cheap area)

Down payment: 10% (R79,500)

Mortgage repayments: +-R6,500 p/m

Lease/Rent expectations: +-R6,000 p/m

Monthly expenses: +- R2500-R3000 (I've read somewhere that a quick rule of thumb for long term is just to use half of gross revenue. This includes the rates/levies and any maintenance over the long term).

E.g. 2

Property price: R1,500,000 (1-2 bed in a more upmarket area )

Down payment: 10% (R150,000)

Mortgage repayments: +-R12,300

Lease/Rent expectations: +-R10,500

Monthly expenses: +- R5000

I'd be net negative cash-flow in both cases.

Perhaps my monthly expenses estimate is inaccurate? But even so, just taking the lease/rent expectations vs. the mortgage repayments, how could one in this environment hope to be cash-flow positive from the outset or even use the 1% rule? I understand that a larger initial down payment would reduce the monthly mortgage costs, but that just means I forgo more cash upfront which still factors into cash flow. I also understand that value appreciation also plays into it, but I'm removing assumptions about appreciation and just looking at a cash-flow point of view.

Is this just a matter of not finding a good enough deal yet or perhaps the market conditions are just not that great for buy-to-let? It's also possible that I'm just missing something as I am very new to all of this :)

Feedback & comments highly appreciated. Thanks.

There are no profitable multifamily building where 50% of your income is used as expenses or if they are profitable, it is just not worth it. Especially with 10% interest rate. 

The 1% rule was actually 2% before, but with the increased competitions buyers are willing to go lower and lower everyday. What my point is, is that it depends on your current market, it is just a screening rule for a lot of investor so they can look at hundreds of properties and toss the ones with terrible returns straight in the trash can and not waste time with them.

Your market has different expenses than the USA and it has different expenses from mine (Canada). You need to figure out exactly how to calculate them and figure them out so you can calculate the NOI and determine the cap rate of your market. Look at the cap rate of properties SOLD, not the ones on the market, only then can you determine if buy and hold is worth it.

Hi Stephen, I am in the same situation as you are in at the moment. I am starting to think that the property market in Cape Town is not at a point where we, as first time investors, could be looking at positive cash flow from rent.

Perhaps the way to go about it for us would be to look at bank sales or auctions?

I am also interested in house hacking, I have to pay rent every month anyway so perhaps it makes sense to find a 2 or 3 bedroom house and live in one room while renting the other rooms. But the property price to rent ratio does not even allow for any benefit in this situation, even in a house hacking situation I don't see myself saving money. It seems that it is actually cheaper to rent than buy at the moment.

I hope that we are missing something here and hopefully someone with experience in the Cape Town property market will shed some light on the matter.

Hi Stephen,

I am also an investor in Cape Town and your numbers are not incorrect. You are however looking at market value offers and expecting to make cashflow off the bat.

Those prices are fair for buyers who need a roof over their heads. But investors have to push past the glossy pages of the selling agent's brochures.

Best discounts are in the more desperate seller market. You should sign up for Sherrif auction updates like this little number going for Auction on 22 November https://www.sheriffhq.co.za/Auction/auction_detail...

As a member you can see who owns it, how much was the loan and refinancing (a.k.a. bank reserve), who the banker is.

Approaching people and giving them a solid deal can nett you 20% discount you need to hit the all powerful cashflow positive.

Why am I sharing this great tool? I make my money buying plot and plan apartments and asking successful agents for deals that come in off the books that need to be closed within a short time.

Plus you need to pay it forward when you succeed!

P.S. The above 3/2 house (872m2 land) has likely reserve of R1 680 000 (if the owners never paid a cent in mortgages) Estimated municipal valuation R2 million (Comps agree)

So buy well you get R400 000 instant equity to renovate and increase your potential rental to R20000.

But the owner might not want to leave anytime soon.

Opportunity is everywhere, you just have to know HOW to look, not just where.

http://www.sahometraders.co.za/2-bedroom-apartment...

Here is a potential cashflow positive Apartment. Highend areas you need to speculate and buy premium. But studying 100 properties in any area BEFORE making an offer will make you better than a rookie and you will make a good offer.

Worst thing they can do is say, NO. Best thing they can say is YES. You just have to invest the time to learn what is a good offer or not.

I'm always inundated with cashflow positive apartments...I just choose to wait until I'm ready to buy. Like a sniper.

Can I miss? All the time. But I never give up, I get better.

Thanks everyone for the feedback. Really appreciate it and it's encouraging to see the willingness to help.

@Philippe: Thanks, I'll take your suggestions and spend more time accurately estimating those expenses. I had a feeling it was a bit on the high side. 

@Chris: Nice to know others are in the same boat as me :) I've often felt discouraged about the Cape Town market...simply because it has felt like prices have gone through the roof recently. But I'm guessing it's just market cycles, needing to be more patient and knowing where to look for the opportunities. I'm still renting as well and I haven't looked into house hacking, but I've also managed to get a really sweet rental deal so I have little incentive to move anytime soon. Best of luck!

@Thoriso: thanks man, some really great advice and resources. I'm going to look into the Sheriff auction updates and like you say I'll need to find other avenues to find the better opportunities. Totally respect your attitude of paying it forward to others...sounds like you've had some good success thus far.

Cheers.

I do it as

gross rent - 10% mgmt - 10% maint - 10% vacancy - landlord hard costs =noi. minus $75/door for profit, and balance at your lending rate

For my area in Scranton/WB PA, 

if it doesnt cap rate over 15% cap rate or 21% cash on cash I move on.

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