Making every cent count

2017-07-08 11:02

At the beginning of this year, Honey Hindoga wrote to City Press to say that, by following our weekly money tips, he had managed to save R100 000, which he was using to buy his first investment property.

His plan was to provide decent, low-cost accommodation for rural and migrant South Africans looking for affordable single backyard rooms to rent close to their work in Johannesburg. “This market has no intention of owning property in Johannesburg as they have families back home,” wrote Hindoga.

Six months later, Hindoga has begun to implement his plan and is already generating more than R19 000 a month. Once his debts are paid off, this money will be free cash to provide him with an income, although he has further plans to expand his rooms-to-rent business, which he estimates will be earning a net profit of more than R23 000 per month by 2020.

How he did it:

Hindoga had already turned his existing home into a cash-generating asset by renting out four rooms to tenants. He used this rental income towards saving for his investment property.

“The property is in a black township and not far from an informal settlement but very close to two main shopping malls in the East Rand, which makes it very attractive to people who are looking for accommodation to rent,” says Hindoga.

Of the R100 000 he had saved, he used R40 000 as a deposit on the R400 000 property, kept R25 000 for bond registration and transfer costs and put the rest towards starting his building extension project.

His mortgage repayment on the three-bedroom investment home is R4 200, but Hindoga did some door-to-door research and found that he could easily cover this mortgage by renting out the existing rooms in the house.

His big idea was to use the large space at the back of the house to build 10 single rooms with built-in toilets, showers and dish sinks to make them secure and unique.

More door-to-door research, which involved talking to other landlords in the area, established that he could rent these rooms out for between R900 to R1 300 per month. Hindoga based his affordability calculation on a rental income of R1 200 per room and on this basis took out a R230 000 personal loan to complete the buildings.

“Personal loans are very expensive but I had no choice as banks seem reluctant to finance building loans and they are such a hassle. This is what I find very challenging when investing in township property.”

Hindoga was immediately able to rent out the main house, which covered the mortgage bond on the investment property. In May six rooms were completed and immediately occupied. Due to the huge demand, he was able to charge a higher rental than his original calculations, receiving R1 350 per month for five rooms and R1 450 for the larger room. His rental escalation is R50
per year.

“My tenants pay their own electricity. All rooms have prepaid electrical meters, built-in basin, toilet, bath facilities and kitchen sink. My friend calls them apartments because they are fully equipped,” says Hindoga who was amazed at the huge demand for single rooms in the area. “People still call me to this day, looking for accommodation.”

All the income from these rooms goes to pay off the mortgage and personal loan. He also still receives rental from the rooms in his residential home. That, together with the R3 000 that he is able to save from his salary each month, will allow him to pay off the personal loan in the next two years. Once that is paid off, Hindoga will be generating a net profit of R18 000 per month off both properties. However, he sees this as an opportunity to expand further.

Although Hindoga is generating enough cash at the moment to apply for another loan and start construction on the next five rooms immediately, he is worried about overextending himself. By waiting until he has paid off the loan on the first six rooms, he will be able to build with cash and no debt.

“I will build the five rooms by the end of 2019 so that by the end of 2020 I’ll buy a third house to expand my rooms-to-let business,” says Hindoga, who estimates that by 2020 he will be earning a total of R23 500 net profit after the mortgage payments. “I’m aware that this won’t be easy to achieve and it will require financial discipline and intelligence.”

Advice from Hindoga to other budding property entrepreneurs: “As I read in City Press, it is very important to buy property in a good area near shops, restaurants, schools, shopping malls, industrial areas.” Hindoga did a great deal of research before he invested, he understood his market and what he could realistically expect to receive. By providing cost-effective, decent accommodation he is building himself a passive income while contributing to alleviating the housing shortage. It is this type of entrepreneurial activity that South Africa needs.

Hindoga’s money tips

Information and knowledge are power. I read a lot about money-saving tips to empower myself.

My money-saving tips are basic things I have read from many City Press articles such as saving money on bank charges, insurance policies, cellphone contracts. However, I have the determination and a strong will to implement them and make them work in my favour. For example, I save R2 000 a month just by taking a lunch box to work to avoid buying unhealthy takeaways. My friends laugh at me for this but I don’t care. I also saved R250 when I moved my DStv subscription from R350 to R99. Every cent counts. I save as much as I can and invest in income-generating assets.

I also try to live a simple life and do away with luxuries. We won’t go on a holiday until the personal loan has been paid off. For me it’s a financial sin to spend R25 000 on a holiday while I owe R230 000 in personal loans with very high interest. The other strong driving force is my fear of losing my job with absolutely nothing to fall back on and then losing my house and everything else. Losing a job in today’s economy can easily become a hard reality so you have to face it head-on.

If you’ve made improvements to your home, which you’re convinced will up its resale value, you’d be forgiven for being upset when you didn’t quite get the offers that you hoped you would.

There are many sellers currently experiencing this problem because, within this current housing market, the power has shifted into the hands of the buyer. It’s causing stress for some sellers who particularly want to recoup the money they pumped into their property, perhaps through making extensions or converting the garage into a granny flat.

According to Cameron Jansen, broker/manager of RE/MAX Central, the differential between the listing price and selling price of homes in the current market can be as much as 30%. “Buyers are aware that market conditions are in their favour and as such are looking for a bargain where possible, often putting in offers that are between 25% and 30% below the seller’s listing price,” explains Jansen.

Industry experts are divided as to whom this buyer’s market currently affects. According to Jansen, it applies to most properties, from the affordable housing sector right up to the luxury market. However, Bianca Arnsmeyer, sales manager at Berman Brothers Property says areas like Cape Town’s Atlantic Seaboard still see high demand. “Very seldom do we have a problem of under-priced properties – especially on the Atlantic seaboard. But given the heightened buyer demand in this area, an under-priced property will be snapped up almost immediately, while the seller will be left ruing missed income.”

How should sellers cope with this?

The key is not to get emotional about a property and informing yourself about your area and what you can expect for your home. If you ignore the current environment and overinflate your home’s value it could result in few offers or even none at all and result in your home being on the market for months.

And even if you get interest from prospective buyers, the deal may still fall flat as banks may not allow the full loan application or reject it entirely. “Banks are very familiar with true market value as they do not want to be exposed when granting a mortgage loan. A potential deal can easily be lost as the banks may not grant the loan to an interested buyer if they believe the property is overpriced,” warns Arnsmeyer.

By then some damage could already have been done. “This can eventually lead to the sellers reducing the price to finally action a sale. Both of these actions have the effect of damaging the image of the property as buyers can wonder what is ‘wrong’ with it that it has not sold as yet – this can have a long term harmful effect,” says Denise Dogon from Dogon Group Properties.

“With technology and information at your fingertips, you could do a bit of research yourself, looking at what properties sell for in your area and also viewing market statistics on numerous online platforms. However calling your local real estate agent for some advice and a free property evaluation could save you a tremendous amount of time, rather than trying to fix your mistake later on,” adds Craig Hutchison, CEO of Engel & Völkers Southern Africa.

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March 18 2018