Mastering the Four Ways to Prosper in Real Estate

Whether you’re a seasoned income-property investor or just stepping into the world of real estate investment for the first time, this comprehensive guide will equip you with the tools to “run the numbers” on any real estate venture. Designed as an indispensable reference, this book aims to empower you with a profound understanding of the essential metrics: rates of return, cash flows, and estimates of value, among others. By delving into these fundamental calculations, you will emerge as a shrewder and more informed investor, capable of making sound decisions and maximizing the potential of any income property.

Without a grasp of these key formulas, evaluating the profitability of a property becomes nothing more than a guessing game. Don’t be fooled by superficially impressive rental income; this book will teach you to discern the hidden truths using practical rules of thumb, preventing you from falling into the trap of investing in losing properties.

The topics covered in this handbook encompass crucial aspects of real estate investment, offering you a well-rounded approach to building your portfolio:

  1. Estimating Current and Future Property Value: Understanding how to assess the present and future worth of a property is vital for making informed investment choices. This book will guide you through the process of accurate valuation, ensuring that you can ascertain a property’s true potential.
  2. Reading Between the Lines of Property Sellers: Negotiating with sellers requires finesse and insight. Learn how to decipher the nuances of sellers’ information, allowing you to identify advantageous deals and negotiate with confidence.
  3. Forecasting Revenue Streams, Expenses, and Net Operating Income: Anticipating the financial performance of an income property before purchasing is crucial. Unravel the intricacies of forecasting revenue streams, expenses, and net operating income to make well-informed investment decisions.
  4. The Time-Value-of-Money Concept for Long-Term Success: Long-term investments necessitate an understanding of the time-value-of-money concept. Uncover its significance and learn how to wield it effectively to enhance your investment strategy.
  5. Comparing Investment Opportunities: Not all investment opportunities are created equal. Develop the ability to compare different ventures objectively, considering their risk and return profiles to identify the most promising opportunities.
  6. Calculating Financing, Rates of Return, and Tax Liability: Delve into the intricacies of financing options, determining rates of return, and understanding potential tax implications. This knowledge will empower you to optimize your investment decisions and maximize profitability.

As you embark on this enlightening journey into the world of real estate investing, remember the crucial rule of thumb: emotions should never drive your investment choices. Avoid falling in love with a property or holding onto it due to sentimental attachment. Successful investors prioritize financial measures, focusing on the income stream and return on investment.

Just as a skilled builder lays a strong foundation for a new structure, we will begin by exploring the bedrock of real estate investing: the four basic investment returns. These returns form the core of nearly every calculation and concept we will explore throughout the book. Mastering these four elements is your key to success in the dynamic world of real estate investment.

Without further ado, let’s delve into the heart of real estate investing: The Four Basic Investment Returns. Each income-property investment presents the potential for these returns in varying proportions, and understanding their dynamics will guide your investment decisions in alignment with your goals. From this point forward, every concept and calculation we discuss will be intricately connected to these fundamental returns, unlocking the secrets to prospering in the realm of real estate investment.

Understanding What Successful Investors Truly Seek

When it comes to successful real estate investors, their preferences regarding property characteristics might vary widely. Some may gravitate towards properties in perfect condition, while others might be drawn to those that require substantial work and renovations. Similarly, the choice between residential or commercial, city or suburban, brick or frame, and even the color of the property might be influenced by personal comfort and individual taste. However, there is a critical distinction that sets accomplished investors apart—their focus on the property’s anticipated economic benefits rather than its physical attributes. For them, the income stream takes precedence over all else.

A fundamental rule of thumb in the realm of real estate investment is to refrain from making decisions based on emotional factors. Succumbing to the allure of a building merely due to an emotional attachment can lead to poor investment choices. Similarly, holding onto a property due to sentimental reasons, when selling would be more prudent, can be detrimental to the investor’s financial success. To avoid such pitfalls, investors are advised not to let emotions govern their decisions. Instead, they should be guided by sound financial reasoning.

In essence, a successful investor approaches real estate as a vehicle for generating returns on their investment. The primary focus is on evaluating the numbers meticulously, analyzing current financial data, and making reasonable projections for future performance. The preceding rule of thumb reinforces the idea that sentimental attachment to a property should never drive investment decisions. Instead, the cornerstone of each decision should be the property’s income stream and the potential return on investment it represents.

To illustrate this point further, let’s explore the significance of the property’s attributes and surroundings in relation to the income stream. While the physical characteristics and location of a property do play a role in its overall performance, they are secondary to the potential economic benefits it can offer. For instance, the arrival of a major new employer in the area may increase the demand for apartments, making it an opportune time to explore investments in apartment buildings. Similarly, the prospect of increased rents might outweigh the costs of rehabilitating a property, making a fixer-upper a potentially lucrative choice.

For the prudent investor seeking a successful return on their investment, diligent evaluation of the numbers is imperative. This involves considering the current financial data and making reasonable projections for the property’s future performance. Sentimental attachments to a property should never sway these evaluations.

The journey to becoming a savvy real estate investor starts with a strong foundation, just like constructing a new building. Understanding the four basic investment returns is crucial in this process. These returns—cash flow, appreciation, loan amortization, and tax shelter—form the bedrock of real estate investment. As you delve deeper into the concepts and calculations that follow, keep these four fundamental returns at the forefront of your decision-making process. They will guide you towards making astute and successful real estate investments, ensuring your financial prosperity in the realm of income properties.

Generating Wealth in Real Estate: Understanding the Four Basic Investment Returns

In the world of income-property investment, there are four crucial elements that lie at the heart of every real estate venture, to varying degrees. These elements represent the fundamental ways to make money with income property, and we refer to them as the four basic returns:

  1. Cash Flow
  2. Appreciation
  3. Loan Amortization
  4. Tax Shelter

It’s important to acknowledge that not every income-property investment will yield these returns in equal measure. Each property possesses its own unique blend of these benefits, and some investments may even lack one or more of these returns altogether. For instance, while one property might generate substantial annual cash flow, another might offer minimal cash flow but the promise of significant gains upon sale. Nevertheless, when combined, these four returns constitute the comprehensive pool of potential benefits that real estate investing can provide.

When making investment decisions, it’s crucial to consider your personal goals and evaluate the strength of each of these returns. Understanding their origins and how to calculate them will set you on the path to success. Throughout this book, nearly every concept and calculation we discuss will be linked to these four essential returns.

Cash Flow: The Essence of Funds

Cash flow is akin to managing a checkbook—money comes in, money goes out. The essence lies in the flow of funds, and this is precisely why it’s referred to as “cash flow.” During a specific period, usually a year, the key concern is whether more money comes in than goes out. If, at the end of this period, you have taken in more money than you’ve spent, then you’ve achieved a “positive cash flow” or “net spendable cash.” This implies that there is money left over after settling all expenses, and it becomes a source of income for you as an investor.

On the other hand, if you have spent more than you’ve earned, resulting in a deficit, you’ve incurred a “negative cash flow.” This negative cash flow represents a deficiency that requires attention and resolution. Just as nature abhors a vacuum, a negative cash flow demands immediate action, prompting you to fill the gap from external funds, such as your savings.

It is essential to recognize the significance of making accurate financial projections, as a negative cash flow could indicate that the property lacks sufficient funds to cover its expenses. In such cases, the investor must allocate personal resources to cover the deficit. By thoroughly understanding and anticipating cash flow, you can make well-informed investment decisions.

Rule of Thumb: Project and Calculate Wisely

For small investors, a negative cash flow is not merely an accounting entry; it signifies that, at a specific point in time, the property may not have enough cash to meet its financial obligations. As a result, you, as the investor, may need to contribute personal funds to make up the shortfall. However, the presence of occasional negative cash flow does not necessarily render the investment fatally flawed. You may recoup such losses through other returns or in subsequent years.

This emphasizes the importance of making accurate projections and diligently evaluating the overall investment. By doing so, you can anticipate potential negative cash flow scenarios and address them proactively. Failure to conduct such projections may lead to unforeseen financial challenges.

Example: Understanding Cash Flow

Let’s explore a basic example of cash flow from an income property. Suppose you own a six-unit apartment building, with two units rented at R800 per month, two at R900, and two at R1,000. All units are occupied, and the tenants consistently pay on time. Your monthly mortgage payment is R2,800, and over the past year, you incurred expenses as follows: R14,100 for real estate taxes, R3,800 for property insurance, R4,200 for maintenance and repairs, R800 for water, and R75 for miscellaneous supplies.

Cash In (2 × R800) + (2 × R900) + (2 × R1,000) = R5,400 per month Total Cash Inflows: R5,400 × 12 months = R64,800 per year

            Cash Out

Mortgage (R2800 x 12) + Property taxes R14000 + Property insurance R3000 + maintenance and repairs R2000 + water R800 = total Cash outflows R53400

Cash in- cash out  = R11400

After evaluating your cash inflows and outflows, you find that you have taken in more than you spent, resulting in a positive cash flow. The specific source of these inflows and outflows is less relevant; what matters is the overall flow of funds. Inflows may originate from rent, loan proceeds, vending machine revenue, or any property-related source. Likewise, outflows may include operating expenses, debt reduction, or expenses associated with adding more rental units.

Understanding and accurately calculating cash flow allows you to gauge the financial health of your investment and determine its potential for providing a steady income stream.

Understanding Appreciation and Loan Amortization


In the world of real estate investing, a good cash flow from your property is always desirable as it means a steady stream of spendable income each year. However, not all properties generate significant cash flow. For those that don’t, the next essential aspect to consider among the four basic returns is “appreciation.” Appreciation refers to the growth in value that a property experiences over time.

The formula for calculating appreciation is straightforward:

Future Resale Price – Original Purchase Price = Appreciation

To better understand the concept of appreciation, think of it as similar to the growth of funds in a savings account. When you deposit R1 into your account today, the interest earned over time causes that amount to increase.

Naturally, you might wonder, “How much growth in value can I expect, and over what period?” Answering these questions requires a deeper understanding of what drives property appreciation. While this book will delve into this topic in more detail, a fundamental principle is that the value of income property is closely tied to its revenue, especially net revenue after accounting for operating expenses. Essentially, real estate investors are buying the income stream that the property generates. The more substantial the income stream, the higher the property’s value is likely to be.

Various factors can contribute to increasing revenue and, subsequently, property appreciation. Changes in market conditions can make a property more attractive, turning a previously marginal area into a fashionable one, leading to a shift in supply and demand. General economic inflation can raise the cost of new construction, resulting in upward pressure on rents.

Appreciation can also be influenced by actions taken by the property owner, such as making physical improvements that allow for higher rental rates, implementing better management practices to attract and retain quality tenants, reducing vacancy losses, and minimizing wasteful expenditures.

Though you won’t fully enjoy the benefits of appreciation until you decide to sell the property, when you do, the value gained from appreciation can be substantial. However, it’s crucial to note that this is not a “get-rich-quick” strategy, but rather a long-term wealth-building approach.

Example: Calculating Appreciation

Suppose you purchase a property for R1,000,000 and sell it at a future date for R1,450,000. The amount of appreciation can be determined by subtracting the original purchase price from the selling price:

Appreciation = R1,450,000 – R1,000,000 = R450,000

Loan Amortization

One of the joys of using a mortgage loan to buy an income property is that it allows someone else to pay your bills. For instance, consider a R1 million office building. Instead of paying the full amount upfront, you could write a check for R300,000 and secure a loan for R700,000. This leaves you with extra capital, enabling you to consider additional investments.

A mortgage loan, however, comes with regular payments, usually made on a monthly basis. So, where does the money come from to make these payments? This is where the cash flow concept comes into play. As we previously explored, rental revenue constitutes a significant portion of cash inflows, and it is these rental payments that effectively pay down the mortgage debt.

Every mortgage payment includes both interest and principal, though the exact amount of each can be calculated in more detail (see Part I, Chapter 3). For now, let’s focus on the core concept. Your tenants’ rent payments essentially help you buy the property by chipping away at the mortgage debt over time.

The process of gradually paying off the debt through regular installment payments is known as “amortization.” For Latin scholars, “amortization” can be thought of as “ad” (toward) and “mort-” (death), which refers to the gradual “killing off” of the loan.

Debt Service (Total Mortgage Payment) – Interest Paid = Amortization

Income-property data is often evaluated on an annual basis, giving rise to the term “annual debt service” (ADS), which represents the total payments made in a year towards the mortgage.

Example: Calculating Loan Amortization

Suppose you make monthly mortgage payments of R1,500, and at the end of the year, your bank informs you that you’ve paid R15,000 in interest for the year. To determine your loan amortization for the year, apply the formula:

ADS = R1,500 × 12 = R18,000

Remember, appreciating the fundamentals of appreciation and loan amortization can significantly enhance your understanding of real estate investment and contribute to making informed decisions for long-term financial growth.

Annual debt service (R1500 x 12) – interest paid for the year R15000 = amortization R 3000

Tax shelter

Did you know that you can significantly reduce your tax liability through property investments in South Africa? It’s all thanks to Section 13sex of the SA Income Tax Act, one of the biggest tax incentives available to property investors.

With Section 13sex, qualifying property investors have the opportunity to claim back up to 55% of the purchase price of a property or apartment over a span of 20 years. This incredible benefit has a profound impact on your portfolio’s Return on Investment, allowing you to be in a Cash Flow Positive and Profitable situation without owing SARS a single cent.

The mechanics of this incentive are straightforward: for the purpose of calculating the deduction, the cost of acquiring a residential unit is considered to be 55% of the purchase price. To qualify, you must own at least 5 residential units in South Africa, solely used for the purposes of your trade, and acquired on or after 21 October 2008. The 5% deduction per annum over 20 years applies only to new and unused units.

If you’re building your property portfolio or already own 5 or more properties, take advantage of this opportunity. By completing a questionnaire, you can arrange for an online consultation with one of our experts who will assist you with your personal wealth plan for free. During the session, we’ll discuss the benefits of Section 13sex of the SA Income Tax Act.

SARS’ Unknown Tax Secret – Section 13sex – Made Easy!

SARS might not be known for giving money back, but a little-known fact is that they have a Tax Incentive called Section 13sex under the Income Tax Act No. 58 of 1962. This incentive is specifically designed to offer a significant tax benefit to purchasers of residential units.

How does Section 13sex work? When you purchase residential units after 21 October 2008, you are entitled to write off a percentage of the cost of the buildings. SARS aims to incentivize property investment for accommodation purposes by offering investors a percentage of the purchase price back.

To qualify for this incentive, certain requirements must be met:

  1. You need to own at least 5 residential properties, acquired either together or over time.
  2. All 5 units must be used for rental purposes, not occupied by you or your family.
  3. The properties must be located in South Africa, available only to South African taxpayers.
  4. The units must be new and unused, with tenants placed by the owner or rental agent.
  5. All 5 properties must be owned by one person with a single tax number.

There are two property types to consider for this incentive:

a) Sectional Title: You own the property inside the walls, and it is usually applicable to flats or apartments. SARS offers a 55% deduction on the purchase price over 20 years. b) Full Title: You own both the building and the land. Here, taxpayers can claim up to 80% of the building cost over 20 years, as the land does not depreciate.

It’s essential to note that selling a property before the 20-year claiming period’s expiration triggers normal recoupment provisions, and a professional tax advisor can assist with calculations. The SARS incentive acts as a deduction on your personal income tax or your company’s income tax if the properties are purchased through the entity.

With that being said please consult with a tax consultant before you start your property journey here is a n explanation from sars


Congratulations! Now that you have a solid foundation, you understand the four key returns that every income property can offer: cash flow, appreciation, loan amortization, and tax shelter. Cash flow is the surplus money after all expenses; appreciation is the increase in property value; amortization reflects the equity growth through mortgage paydown, and tax shelter shields income from taxation.

With this knowledge, you’re well-equipped to dive into the world of real estate investing. From this point forward, every concept and calculation we explore will revolve around these fundamental returns. Get ready to take your real estate investment journey to the next level!

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