I think it’s very important to understand that investments of all sorts come with a certain degree of risk. Identifying and understanding these risks is already a step in the right direction.
In saying that, there are loads of variables to be considered when weighing up these options and there isn’t an easy answer to your question. I do, however, have an idea that could decrease your risk (cash flow) and have a very similar outcome on the creation of your wealth. This way will require you to be patient and disciplined in your journey to building wealth.
The first question I have is: have you thought about purchasing your own property and paying it off sooner?
I will show you a calculation that could help you with your decision. These are just imaginary numbers, but the principle remains the same. If you purchase a home to the value of R2 million over 20 years at a 7.5% interest rate, you would be paying R16 111.86 per month. If you increase your monthly repayment by 10% (R17 723.05) you will pay off your property in 16 years and four months.
If you pay the home off over the full 20-year period, you will pay R1 866 848 interest. If you repay over the 16 years and four months, you will pay R1 475 419 interest. You will save R304 492 by paying off the home a bit sooner.
Let’s say you keep paying the R17 722.10 on the investment property for the next three years and eight months. Let’s imagine you buy a property in a good location for R1 million. Your monthly repayment at 7.5% will be R8 055.93 per month. Let’s assume you receive R8 000 rental income per month, and you will probably pay close to R2 000 on levies, rates, and taxes. This leaves you with R6 000 that you can use to service the bond. Let’s see what the effect will be if you pay R23 772.10 (R 17 722.10 + R 6000) on your investment property for the three years and eight months. You will have a remaining balance of R118 275.50. If you keep paying the R6 000 per month you will pay off the property in one year and nine months. The total repayment term will be five years and five months.
This is very important to understand. This is great on paper, but you will have some bumps and bruises along the way. You will pay tax on the rental income. There will be some unexpected expenses (burst geyser, plumber callouts, leaks, painting, and so on) that will probably influence your cash flow. You may even (almost certainly) have a month or two that your property will be vacant where you will have to service the bond out of your pocket. You may also have some issues with tenants causing damage to your property that could be even more than their breakage deposit.
Also note that you would probably want to work with a good rental agent who could take care of contracts, disputes, general maintenance issues, procurement of tenants, and so on. A rental agent’s fee is on average 8% (excluding Vat) on the monthly rental amount. These expenses are tax-deductible, but they will have an impact on your cash flow and will only be recouped at the end of the tax year.
In my humble opinion, I would consider paying off my own property as above and then have a look at purchasing a rental property. The true secret lies in accelerating debt repayments and sticking to a 20-year strategy.