How two investors turned their property portfolios from debt traps into retirement income.
Building a property portfolio for retirement was the goal for two of last year’s Absa/City Press Money Makeover candidates. Unfortunately, their dream of generating retirement income from property was fast becoming a debt nightmare.
Like so many people wanting to get into property investing, both Nkosi and Thuli had bought new properties too quickly and in some cases the properties were costing a lot more than they could earn from rental. By taking on the Money Makeover Challenge, they put their finances back on track to achieve their retirement dream.
The Absa/City Press Money Makeover Challenge takes six individuals through a money bootcamp over six months in which they transform their finances.
Environmental affairs officer and single mom Nkosi became a property investor by chance rather than design. She bought her first home in a township in 2007. Five years later Nkosi decided to move closer to amenities and work, which would save her money. She bought a new home in town and decided to rent out her township property.
Based on the success of her township rental, Nkosi made her first property investment, buying a site in her home province to develop a house to let. She had just finished building the property, which had no mortgage as she paid for the building with cash.
In the meantime, Nkosi moved again for work, letting out her town property as well. Unfortunately, Nkosi was caught out by making two offers on different properties. She had made a commitment on an off-plan development when she was approved for the purchase of an existing property.
Although she could have exited with a penalty, Nkosi decided to stick with the off-plan development as an investment property.
“To be honest I was bit shocked and scared about how I was going to cope. I thought it was too late to think about all those things or change anything,” says Nkosi who by now had five properties but was struggling with cashflow.
Thuli, a mother of four and head of operations at an NGO, has built up a property portfolio of four rental properties with the aim of providing her with an income in retirement in 15 years’ time, but the plan was not working. Both Nkosi and Thuli were overcommitted on the properties and did not plan properly for future liabilities like children’s tertiary education.
Leola Jooste, Thuli’s adviser, and Funi Nemanashi, Nkosi’s adviser, created financial plans to ensure that Thuli and Nkosi met their goal of having the properties paid off by retirement.
The first step was for them to focus on settling their short-term debt, including credit cards, so that they could divert the repayments currently going to short-term debt into their mortgages. This required following a proper budget and cutting back on unnecessary expenses.
By sticking to a budget Nkosi went from never having a spare cent at the end of the month to having R8000 she could use to settle debt and boost her savings. She settled R30 000 in credit card debt and built up an emergency fund. She also started an investment fund to go towards her property business rather than just relying on short-term debt for future investments.
Thuli separated rental income from her salary income, opening a second cheque account for her rental income. In understanding the true costs of her properties, Thuli realised only one was earning enough income to cover the mortgage, rates and levies. The other three properties were leaving her with a monthly shortfall of R13 000 a month which she could not maintain. She decided to sell the one property partly due to a high monthly levy which makes up 32% of the rental income. Given the current rental market in the area, it is unlikely that Thuli will be able to increase the rental sufficiently to close this shortfall. She then used the money that was going to fund the property to accelerate the repayment on the remaining properties, so they are mortgage free in 10 years’ time.
In retirement Thuli and her husband plan on moving into one of the rental properties, leaving them with two rental properties for income. Jooste calculated that by the time they retire in 10 years’ time, these will generate an income of about R25 000 in today’s value.
In Nkosi’s case three of the five properties were paid off, however one of her properties had no tenant and another required Nkosi to top up R2000 a month to cover the mortgage and levies. Nemanashi identified that if Nkosi stuck to a budget and paid off her short-term debt, it would alleviate the financial pressure and could continue holding onto her properties which could provide her with about R38 000 from her properties in retirement in today’s value.
If you are a potential property baron but find yourself trapped in credit card bills and short-term loans, follow the 2020 Absa/City Press Money Makeover Challenge starting on 23 February in City Press and in YOU magazine on March 5 with a whole new line up of contestants. Each contestant has been allocated their own Absa financial adviser who assists them in organising their finances and reaching their personal financial goals. Personal finance expert Maya Fisher-French shares their stories with you and inspires you to start your own journey.
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