Welcome to Day 4 of the Challenge. The lock-down is well underway and we hope that you are looking after yourselves and loved ones and remaining locked up. Today we are expanding from yesterday’s challenge, where you calculated your freedom number. Now we are going to work out how many properties you need to reach this freedom number (Just a hint, it’s probably less than you think).

Passive Income from Property
We have published several articles about the benefits of property and how properties create passive income. We won’t go into those details on this challenge. What we want to look at is what income we can expect to receive on each property.
This is a challenging question and one where there isn’t a “one-size-fits-all” answer. We can use typical examples and estimates for this exercise.
Income per Property
Single Family Homes & Apartments
From our experience, and rule of thumbs in the South African property industry, we would recommend that you should receive at least R2,000 positive cash flow from a Single Family Home or Apartment.
That being said, this is a very vague number as it doesn’t take into consideration the value of the house or the rental income.
We can further expand this number in relation to Return on Investment (ROI). This means that we would look at how much capital you had to invest upfront to purchase the property against the total annual positive cash flow. A good rule of thumb for this is 15% ROI.
Let’s take a look at an example. Let’s suppose you purchase a house for R800,000, you negotiate hard and manage to purchase this at a 20% discount from the market value of R1million.
You obtain a 90% bond from the bank (R720,000) and will need to pay transfer and bond registration costs of R44,732. Therefore, your total upfront capital investment is R124,732 (R80,000 deposit + R44,732 transfer and bond registration costs).
Example
- You rent the property out for R10,000 per month
- The bond repayment is R6,363
- Municipal rates of R950
- Total Positive income R2,687 (A very healthy cash flow)
- We have not taken into consideration maintenance costs or rental management costs.
Over 12 month, your total income will R32,244. As you had to outlay R124,732, this investment would return 26% (R32,244/R124,732) which is a very healthy return.
This is a basic example to illustrate how both cashflow and ROI play a very important role in purchasing an investment.
Let’s change the example slightly. Let’s assume that you had to outlay R324,732 to purchase this property and receive the same R32,244 annual income. This investment would now return 10% on the money you outlaid.
All of the numbers are relative to the amount of money you outlay upfront and how much cashflow you produce. Always be sure to do your due diligence upfront before investing in any property.
Multi-let Deals
This is somewhat of a more complicated calculation as there are more factors to take into consideration.
Therefore, we will not explore this set of properties in much details due to the complexities, but it would be important to let you know a few points.
Typically the banks give a far lower percentage low for these types of properties. You could expect to receive 60-70% financing from the bank. Also, these loans normally calculated over 10 years and not 20 years as with residential bonds.
We would expect to receive at minimum R10,000 monthly cash flow from a multi-let property, but again this is relative to the amount of capital outlaid and the size of the investment. The same calculations for cash flow and ROI, as mentioned above, apply to multi-let properties.
How Many Properties
Let’s take what we have learnt here and apply it to our exercise from yesterday. Take into consideration that these are estimates and proper due diligence will be needed before purchasing any property investment.
Take the number that you calculated and divide that by R2,000 per month and this will give you the number of single units that you will need. If you take your freedom number and divide it by R10,000 this will let you how many multi-units you will need to reach your number.
Let’s assume that your freedom number is R20,000 and we know that we should make R2,000 per month on a single-family home. This means that you will need to acquire 10 properties to reach your freedom number. Or 2 multi-let units.
I hope this guide has helped you put some perspective on your property investing journey.
Need some help? Head over to The Property Collab Forum and drop a note there and the community can help you out. Don’t forget to invite your friends and challenge them to complete #21DayPropertyChallenge.
Good Luck and see you again tomorrow.