Author Topic: Help out a South African Mustachian! Does property rental include inflation?  (Read 1599 times)

DanielG

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Greetings from South Africa!

I have been sifting through a lot of the information all over the forums and been learning so much recently Ė so I want to thank you for that first off.

I wanted to put a question out to you and hopefully get some feedback to help with a thought dilemma Iím having. Something that I have been wondering that I havenít managed to find yet is a question on whether to have investment property (rentals) or invest the money in cash in the following situationÖ

Assumptions:
-   100% occupancy
-   No home loans (no interest/debt)

Here in SA itís possible to get a 2 bedroom flat for roughly R750 000 (work on 10-1/ dollar, so $75000) that you could get about R5000 back per month (net). So the net annual income would be 12 x 5000 = R60000. This means that the ROI is 8% per year. Now my question is: Does this 8% represent a real return? Because it makes sense to me that the rent will go up as inflation goes up (you can put up your amount of rent each year).

If I had to put that R750 000 in investments and earn say 8% a year, that would not represent a real value would it? Iím just confused as to whether they are different or not?
Because the way that I see it, if I calculate that I need R20 000/month to retire, or R240 000/annum (gross values), then I would need say 4 of these properties, which would cost me R3 000 000.
On the other hand, if I assumed a 4% SWR I would need R6 000 000 in investments which is exactly double.

I know that having the apartments would mean that I would have other concerns such as expenses for upkeep and renovations every couple of years, so I do know that will cost a bit more than having the money purely in investments, but that could be factored into the fact that the properties would be appreciating while I earned the rent off of them. I am a mechanical engineer and extremely handy Ė so I would do the renovation work myself once I was 'retired'.

Can you please tell me if I am making an error here? Or is does having property like this mean that I need almost half the amount? Does the 4% rule also apply to property?

Thanks in advance :)

SDREMNGR

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You are comparing apples and oranges.  You don't have a SRW with real estate.  With stock/bond investments, the increments of money are small enough that you could liquidate roughly 4% a year.  With 4 properties, your option would be to liquidate 25% of your holdings at a time.

RE is special in that you buy it heavily leveraged (mortgage), you have someone else pay for the mortgage (rental), and assuming you bought it right (low price, good rate, well managed) then you can get much higher rates of return than passive stocks.  Also, depending on how big you build your portfolio, you have a built in retirement job (landlording) which some people enjoy and others HATE.  You only know after doing it a while.  Most end up hating it.  Like anything in life, YMMV.

I'd recommend a path of diversifying in both stocks and RE.  I max out my Roth IRA and my Simple IRA as well as my wife's so we save about $37k a year into stocks.  The rest of the savings goes toward RE purchases.  I would not put all your retirement eggs in one building or properties in one area.  Diversify.

As far as your calculations go, RE historically appreciates at the rate of inflation ON AVERAGE. It may go up or down wildly in any given year though.  So for your modelling, you can assume that rent increase and appreciation will be at 3%.  Assume vacancy of MINIMUM 5%, 10% to be more conservative.  Number 1 rookie mistake is to model out unrealistic expectations and results and then get hurt if you can't meet the 98% occupancy you need to pay your mortgage.

arebelspy

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Because the way that I see it, if I calculate that I need R20 000/month to retire, or R240 000/annum (gross values), then I would need say 4 of these properties, which would cost me R3 000 000.
On the other hand, if I assumed a 4% SWR I would need R6 000 000 in investments which is exactly double.

Right.  Because you're calculating 4% on the paper portfolio and 8% on the real estate.  Naturally you'd need twice as much at 4% to generate the same as the 8% is.

You may indeed be able to FIRE with a smaller investment in Real Estate than you would in equities, if you can earn a better return.

If it's stabilized and accounts for all expenses (including long term capital repairs), you may be okay doing this.  There are other risks, and it often is more work than a passive paper portfolio, but the bottom line answer to your question is that yes, if you earn a higher return, you can FIRE with a smaller portfolio.  You may just run a higher risk of having to return to work at some point.
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