Investor of the Year Finalist – Lehan LeGrange

Investor of the Year Finalist – Lehan LeGrange

I want to enter the Investor of the year award in hope of being exposed to more like minded people. I seem to read a lot of articles in the last few years that put property investment in a very bad light, yet in my own experience I have grown significant wealth through the properties that I bought – all since 2011.

I would like other first time (scared) investors out there to know that it is not as hard as those articles make it sound, and that if I did not make every decision to buy the next property as purposefully as I did, I would have been under a lot more financial stress at my tender age of 30 than I currently experience.

My girlfriend (currently my wife) and I were both fresh Honours graduates from Stellenbosch University in 2011. We were unsure of the buy or let decision, especially because we did not know the process of buying a property at the time. We knew that it was very cumbersome, “high risk” according to the media and very scary to us at the time – me being 23 and herself being 21. This was a time during which all the prominent papers and news feeds were analysing the buy vs rent decision, and more often than not concluded a “rather rent” decision three years after the property bubble burst. Regardless of this, we made the sums with real properties, comparing the rental to be paid with the cost of owning each flat in each area within the Cape Town CBD.

At the time I was unemployed and my girlfriend just started her new job in Cape Town CBD. It was a local government election year and the municipal government of Cape Town had been making very good progress in cleaning up the city streets, eradicating crime, building the MyCity IRT system, boosting tourism and business interest in Cape Town etc. during the 5 years prior. The property prices at the time did not seem to reflect this yet, though, still recovering from 2008. We made the tough decision to buy a property in the Cape Town CBD, in spite of all the fears that went along with it. We knew that we wanted to be owners, not renters. We want to build wealth, not just have a place to stay in. We want to be masters of our lives, not corporate slaves.

Knowing that the banks would not lend to us at all, we had to get a partner that would qualify for the loan and that trusts us. We agreed to pay rent to my mother if she bought the property with us, and even though this brought us very close to the cost of owning the property in full by ourselves, it was still worth it because the bank would only give us a loan on those terms, especially because I was unemployed.

We bought the apartment in November 2010 and moved in during that December. I spent the next month walking door-to-door with my CV in hand trying to get a job. Again, companies were not hiring, unemployment was increasing, qualified experienced people were looking for work for 6 months etc. It was a bad time to be unemployed. At last I managed to worm myself into a sales position in one of the prominent manufacturers in Cape Town, and we were able to manage our part of the apartment’s cost plus my mother’s rent every month.

We subsequently moved to Johannesburg after I got a reasonably paying job at a large corporate in Johannesburg. Seeing that our apartment had now become rentable and vacant, we started earning our first rental income and thereby soon realized how little money we actually spent in order to invest in such a valuable asset. We were paying less for our prime-located apartment than we were paying monthly for my girlfriend’s second hand Nissan Micra because of the rental income negating the cost. We therefore realized the power of the “leverage effect” very early. This is the concept that I believe many would-be property investors as well as qualified Financial Advisors miss when they assess the property vs. listed shares investment decision. They always compare R500k invested in shares vs. R500k invested in property over time, but they never seem to realise that you actually only invested R50k in deposit plus R30k in legal fees into the property and borrow the rest from the bank. Therefore your returns should be calculated on R80k invested; not R500k. Property gives an investor the advantage of a stable instalment over the years with an inflationary increasing rental income, thereby maximizing return over time in the market with “other people’s money”.

Our first two tenants were horrible, though. At our young age we had to deal with one tenant who reportedly fled the country before the “Mafia” carried all his furniture away and changed the lock to the apartment. Two weeks later a colleague of his got my phone number in some way and begged me to give her grandmother’s wardrobe back that he was borrowing from her. She just did not want to accept the fact that the “Mafia” took this furniture as well. Having heard nothing from him for two weeks we got another tenant in within a month and decided to rent the apartment fully furnished.

She was good at first, but always late with the rent. She was a student from Angola and had a very thriving social life according to the many penalty fee letters we received from the body corporate due to noise disturbances and disorderly conduct. When she moved out we found the toilet broken, shower head broken, walls full of marks, stainless steel pots and pans rusted and unusable, the carpet riddled with burn marks and the mattress cut with what looked like a scissor cut. Cape Town had a bumper rainy season and the apartment was flooded twice because of the blocked drain on the balcony. Selling was top of mind for us because we just had too many issues with the flat and on top of everything, the City of Cape Town approved plans for a building to go up adjacent to the apartment’s balcony without even an alley way separating it – blocking the full view and sunlight we had coming in and slashing the value of the properties in the building. We had experienced one of the worst cases of property investment and this was our first property investment. We had to dig deep into our patience and suck it up, knowing that if we sell now we would only realise our loss. Fortunately we stuck it out, quickly recovered from the loss due to the improvements in the city mentioned above and secured a stable, good-paying tenant. Our dog property swiftly became a golden nugget – one that would soon after help us secure another property.

We were still keen to buy more properties because of the leverage effect, but we realised that it would be foolish to invest in too many properties too quickly without an emergency fund. We therefore started building up a “cash fort” (or as we call it a “bonsfonds”) in order to deal with the worst case scenario – we need to be able to sustain our lifestyle in full for six months with this fund given that both of us lose our jobs and the tenant does not pay. We managed to do this within two years of disciplined saving in a diversity of unit trusts from the most renowned investment houses.

After we had freed up a little more risk appetite, we decided to test a whole new market – the upcoming middle class (R300k to R500k in value). We realized that government policy and labour movements favoured the creation and growth of this market, and that rental demand is high in this market. Again, we were scared. We knew very little about tenants in this market and we did not know what we would do if something goes wrong. Despite this fear, we knew we de-risked ourselves by creating a bonsfonds and we now had to start looking for something out of the ordinary. At the time, rentals in Kempton Park did quite well and we saw flats advertised in Kempton Park CBD for R380k, all costs included with a rental income of R4400 per month. We calculated that we would need to carry a shortfall of R200 per month in the first year between the two of us and we would be cash-flow-positive in year two. That was 2015. We are now cash flow positive on this property without having any tenant issues and we can resell this apartment for R520k according to classifieds of apartments in the same block. That is a R140k profit within 2 years on a cash-flow positive property with none of our own money down, apart from the shortfall in the first year.

In the meantime we kept building our reserves, dabbled in a few other prospects (including buying a home with a large erf size in the South of Johannesburg and subdividing it – which I am yet to find out whether this is profitable) and last year (2017) we decided to go full blast for Cape Town properties that look very promising and close to cash flow positive. I searched classifieds and auctions but could not find anything promising for the first 3 months. Everyone was punting Parklands at the time but I could not justify the area’s cost to myself in 2017. I passed up a good opportunity in 2014 in Parklands, but I would rather regret not buying a property rather than regret buying it. We needed the exceptional property – the unicorn.

I subsequently stumbled upon a single complex in Sanlamhof, Bellville in the classifieds. Properties were selling for between R380k and R450k depending on size and parking in this complex, compared to sales prices in excess of R600k in the neighbouring complexes in Sanlamhof. It turned out that this specific complex had been plagued by druglords, gangsters and prostitution for years. It was known as the brothel of Bellville. There was recently a new board of trustees elected that started turning things around. They painted the walls, paved over unmaintained grassy areas, hired a new guarding company, sharpened up access restrictions and installed cameras – criminals hate cameras. We bought 2 units – one at R410k and one at R440k (with a garage) and got 100% bonds for both. The rental on these units were R5450 and R5300 respectively. We had to catch up the garage unit’s rent but we wanted to be reasonable with the tenants and therefore phased the increase in bi-annually rather than a one-shot increase. Keeping well-paying tenants at lower rent is better than having a vacant unit for a month or two. Less than one year later both these properties are now cash flow positive and I was informed by an agent in February 2018 that she had a signed OTP for the unit with the garage for me for R530k. That means we made a R60k profit (R530k – R440k – R30k for legal fees) on cash invested of R30k in legal fees (200% profit in less than a year). We did not accept because we anticipate better growth in the short to medium term. To date both these tenants have paid promptly.

We also bought a unit in Maitland, Kensington under similar circumstances – body corporate in trouble, rental is high, bonds are declined, values are depressed, although the body corporate recently invested in cameras, biometric access, sharpened security, painting, cleaning and restricting access and Salt River next door sells for 2 to 3 times the price per square meter. We applied for a bond to buy this property worth R530k, but were declined on account of the body corporate’s poor financials. The rental for this apartment was R7500 and we believed in our research and analysis enough to access the equity in the first property we bought in Cape Town CBD. By now (May 2017), the value of the property grew enough so that we could draw from that bond to buy the Maitland property. This gave us a further constant cash flow of R5200 net of rates and levies, which then further increased our purchasing power for more properties and building up a higher bonsfonds. This apartment was untenanted and we were at first struggling to get it tenanted. After two weeks of no-show from prospective tenants, we offered our Cape Town CBD tenant this flat in Maitland, as she had been complaining about the high rental in recent years. She was very excited to move into this apartment as it was bigger, close to transport and cheaper than the CBD flat. It was a win-win deal. After 6 months post registration similar apartments in the complex were advertised for R650k each. This constitutes a 21% growth in the capital value of the property.

This led to an unfortunate 3 months of the Cape Town CBD flat standing empty. Rental demand took a sudden dip. We decided to use this to our advantage, though. The previous tenant had been paying below market average rental, and we used this chance to fully furnish the apartment with modern furniture that would attract young money. One week after the new furniture was moved in and the apartment advertised we had three applicants ready to move in asap and pay two months’ deposit. The furniture made a huge difference in CBD demand.

Fortunately we prepared for setbacks through our bonsfonds so we could calmly take the 3 months’ knock, however we did not even have to use the bonsfonds as our low maintenance lifestyle could cover the rental shortfall. Once we signed the new tenant we started recovering the cost of the furniture and we are back on track to make a good return on investment once again. After we recovered from the shock, we wanted to see if we could buy another property in Maitland that is cash flow positive with legal costs included. We bought one in November 2017 and it is currently in transfer.

We are right on track to add more properties to the portfolio, and we will soon probably start looking at new challenges like buy-turn-sell and commercial property (which I am currently researching), but we love what we are doing and we want to let South Africa know that property is one of the ways you could build very good wealth – slowly but surely.

I want people to know that my wife and I do not earn exceptional salaries, yet we built up a solid asset base by borrowing money from the bank and paying off the bond with the tenant’s money (thereby creating wealth that otherwise would not have been attained).  This is mostly due to the leverage effect of property, and having these properties actually makes us sleep better at night in terms of retirement. The stress of finding a tenant, getting a bond, doing maintenance to the flat and all the other usual excuses honest middle-class people find to not invest in property are far outweighed by the security of knowing that you have this cash generating asset base that you can see and feel, visit and control. Our properties are real emancipators in our eyes and they have the potential to allow us to retire well very early in life and enjoy it while we are young if we see fit.

In comparison, I have not experienced the same with listed shares or unit trusts. One cannot influence the price of the share, the dividend that is paid, the management of the company or the operations or the staff. One has to believe in the future prospects of the industry and bank on the current or future management’s ability to take advantage of these prospects. One has to constantly squeeze one’s budget to invest one’s hard-earned money into the shares or unit trust and cannot borrow money for this to the extent that one can with property.

I really hope that our story may inspire other young people to not be scared of owning property and to jump in, find the right property (very important), and learn. Constantly raise the bar for yourself and constantly try to improve on your previous purchase. Know that it might hurt for 2 year – it might even hurt for 5 years – but after that these properties start making significant extra money for you and you will be less dependent on measly salary increases at work and slave driving bosses with each one you buy.

Do your research, talk to property investors and estate agents, read articles, research papers and books on property investment and take the first leap. It is worth it!

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