Why I’m selling my real estate

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The case for buying real estate

As a kid, I read rich dad poor dad (affiliate) written by Robert Kiyosaki. It was a good read, but the whole book (and probably a lot of the subsequent books as well) can be summarized in one concept. You need to spend the extra money you have every month, on investments that constantly bring in additional money. It’s a simple concept, and it snowballs once you get the process going because of the effect of compound interest. One of the very first ways I identified to achieve this is with the help of real estate. It took me a year and two months to save the deposit for my first property. When I bought the property, it was literally my entire net worth, which looking back was idiotic.

Real estate just made sense. It was an investment 23-year-old me could understand. I imagined a future where I had 20 paid off investment properties that were rented out and I simply lived off the rental income. I ran the math and it looked legit. The profit from the first property would pay off the second until everything was paid off, at which point I’d retire and travel the world.

The mathematics of owning real estate

Let’s look at the mathematics of owning real estate. If you bought a rental property at a cost of R800 000. You’d be able to buy a two-bedroom, two-bathroom place and depending on the location, it might even have a small garden. Rental for a property like this should run for about R7 200 a month (I made a lot of assumptions just like everyone else running the numbers).

By the end of the 20-year repayment period, you’d have real-estate worth about R3 million. In comparison, if you were to invest in shares, your investments would be worth about R2.4 million with the same input capital. This is 20% less than what you would have retired with had you invested in real estate. The comparative growth can be seen below. The REIT line starts out higher since you can invest your transfer and lawyer fees you would have paid buying real estate.

So far, so good. Let us now assume that you are retiring with property to the value of R20 million. Had you invested in shares you would have saved up about R16 million, 20% less than when investing in physical property. 

Living off your properties

The property yield is about 10% (yearly income) with the property value growth about 7% per year. Typically, about 2% of the yield goes towards levies, rates and taxes and another 0.5% towards maintenance. That leaves you with an income of R1.5 million (the remaining 7.5%). However, you’ll be paying the worst tax you can be paying, income tax. You will only see about R980 000 of that money and the president considers buying another private jet (the other planes are lonely).

Let’s assume you drew your money from your share portfolio, while still requiring 7% growth. You will receive 1.5% from dividends (the typical yield of the Top 40 or International Exchange Traded Fund (ETF)). On the dividends, you will pay 20% withholding tax. In addition, you will need to sell 5.3% of your portfolio. On this, you will pay capital gains tax. The tax on the dividends and capital gains will be R103 200, leaving you an income of R984 800.

Why I prefer Equities

As a result, the income from real estate and shares will be similar, all things considered. This brings me to my first reason for selling my investment properties. If you own property worth R20 million, you are managing about 25 rental properties. Yes, you can outsource the management, but that’s going to cost you 5% to 10% of your capital, in which case equities are owning your property performance.

I have to rent out a property on average once a year. That’s 3 showings of 2 hours per year. I also have to do maintenance about 2 times a year costing me another 2 hours each. Add paperwork, income tax submissions etc., of about an hour a year and you are looking at about 11 hours per year, per property. That is about 275 hours or almost two months’ worth of property management, in retirement. It also means that you have to be close to your properties. This leaves little time for sipping cocktails in the Maldives.

Equity in the form of ETFs has no management, the tax is subtracted automatically and can be done from anywhere. That’s my type of investment. Granted, you must make the decision for yourself as to what you want to achieve, but I’m all for low maintenance investments. There are a few other issues regarding property management that I will address in the follow-up article, 9 reasons why I don’t want to retire with property.

Be safe out there,

Hendrik

Quote of the week

"People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30-year mortgage." – Doug Larson Click To Tweet

Endnote

Thank you for reading to the end. Apparently, the average person spends 8 seconds on a page, so you are special. If you have any suggestions, feel free to drop me a mail on the contact page. If I missed anything or you have questions, don’t hesitate to comment below. I might even notice it and respond. If you enjoyed this article and really want to throw me a bone, please share it.

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Comments

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  3. Hamster

    Hi Hendrik,

    Good post! My wife and I owned 4 properties, the one we live in and 3 rentals.

    When we started our journey into stock market investing (especially with plenty ETFs now available here in SA), we did a lot of calculations and came to the conclusion that long-term investing in the stock market (via ETFs in our TFSAs, low-cost RAs with 10X, etc), it became clear that rentals really aren’t worth the effort, cost or concentration risk. We started selling them off (the last one is in process at the attorneys) and we moved all of the capital from the sales into our primary residence’s bond, which will be paid off soon (5 years total).

    We did a lot of back-testing and found the properties did a lot worse than your figures above! The rate at which Rates & Taxes and Levies went up were way above inflation, yet the rental income stagnated and fell well below inflation (looking back over 16 years, from when we bough our first rental).

    So, I agree, getting your savings into low-cost, well diversified ETFs (or other products) is the way to go!

    Cheers mate!
    Hamster

  4. Post
    Author
    Hendrik Brand

    Thank you for the comment Hamster.

    When you see the figures on paper it always looks good, but rarely live up to the expectation. It also took me renting out two properties to come to this realisation. One can do well with properties, but like you appropriately stated, it is not worth the effort, cost or concentration risk.

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  13. Tanya Mason

    Hi Hendrik,

    I came across your article today… asking myself why I’m am I doing this shit (I sell and rent real estate) and lost a listing to another agency arrrghhh)

    May I say as a real estate agent – you (and your fans :-)) are completely correct about the returns offered by real estate investment – HOWEVER – we have 3 cottages on our property (Granted not everyone wants to live in a “commune”) our cottages pay our bond as well as our ALL our utilities…(17k/month roughly) so there is still opportunity to make a return but the methods are counter-trend and returns may not be as high as shares or other … we are in the early days of the golden leash untying – so debt first (my RCP and credit card will be done this month!!) and then the small amount owing on the house!

    Lastly though – may I please ask what shares you invest in and how do you even know what to buy… We have an ETF’s which seem to be a bit slow (Its early days though) but hubby wants to invest in shares and its a bit daunting 🙂

    Love your articles – lots more to read….
    All the best with baby and your family!!
    Thank you
    T

  14. Post
    Author
    Hendrik Brand

    Hey Tanya,

    Property really has its ups and downs. On the one hand, the returns look great and as you mentioned, sometimes are. And on the other, it doesn’t always play out as we expect. It was really hard for me to make the choice to move on.

    Paying down debt will always be the best way to spend money since it almost always beats other investments. So keep at it and good luck with clearing the last of it. Celebrate it properly once you get there, it’s a milestone to independence.

    As hard as we like to think that we will beat the market, it is almost impossible, with only 9% of fund managers managing this over a 5-year period. So save yourself time and continue investing in broad-market ETFs. I like World ETFs and the top 40 ETF. You can read more on my distribution in my monthly finance update.

    Thanks, we are getting the hang of this baby thing. Or we are in the eye of the storm. Who knows 🙂

  15. Stefan

    Hi Hendrik

    I love the blog and really enjoyed this write up about property!

    I’m an artist and realised I needed to get more savvy with my money and investments and you’ve helped a lot with that, so thank you.

    I’ve thought about buying property for a long time and came to the conclusion that if I could save a 25% deposit for an +-R800k apartment, I’d be able to get a tenant in that could effectively pay off the bond on the apartment over the next 15 years.

    I realise I may have to factor in hidden costs like no vacancies and repairs but figured if my deposit was large enough that the monthly rental would cover the bond and then in a matter of time I’d have someone else effectively pay off my property. (This 25% deposot is over and above my monthly 10X retirement contributions too)

    I’m interested to know your thoughts and thank you in advance for taking the time to read this! 🙂

    Sincerely
    Stefan

    1. Post
      Author
      Hendrik Brand

      Hey Stefan,

      Thank you for reading and I really appreciate the positive feedback.

      You are summarising the allure of investing in property perfectly. This was also my approach starting out. There is definitely money to be made in property and buying the right property is rewarding.

      I gave it a proper shot and for me personally, the problem is the management, the trading costs and the fact that property is illiquid.

      It is really awesome that you have started to take charge of your money. Keep going and you will make a success of it. We are all still learning as we go.

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