Purchase a 2nd Property or to Wait - Durban, South Africa

[Account Closed]

Hi there,

I have no doubt that this is a silly question, and I have already an idea of what the answer is, but I thought I would ask for some advice from experienced real estate investors.

I am 4 months into owning my first investment property which has increased by 40% in value due to me having bought the property off-plan a year ago and the low interest rates in South Africa which have helped the properties in Durban increase significantly.

I am now looking to refinance my property and then add an addition amount that would allow me to put down a substantial deposit on a second investment property.

The rental from my current property exceeds the monthly costs and produces a profit of around 10% of the rental income. If the tenant in this property were to cancel their lease, I would be able to cover the expenses myself from my salary.

Being 28 and open to the ideas of taking more risk than someone more mature than myself, would you advise that I purchase a second property similar to the one I currently own, or go for a smaller property? 

I would be able to cover the costs of 1 property, but if both had similar monthly costs, and both sat untenanted for an extended period, I would quickly find myself in a pickle, financially.

Any advice of comments would be greatly appreciated.

Regards,

Ben

[Roy N.]

Ben,

Welcome to BP!

While I'm 20yrs your senior, I'm not certain I qualify for the more mature label - definitely not if you were to ask my wife.

In reading your post above, it would appear the significant short-term appreciation your property has experienced is a result of a frothy real estate market, rather than having acquired the property at a steep discount and/or forcing appreciation through improvement of the property. 

While such an increase in value is a lucky windfall that brings a smile to your face, I'm always cognizant of the fact the head can come off the market and some of the appreciation given back to the ether from whence it came.    In your shoes ... well, I'd not be contending with 1.5m of snow, but that's another story...  Assuming your property will appraise at, or near, these lofty new market valuations, I would most definitely look into pulling some of the newfound equity back out of your property but I would not put myself too close to the edge - you want to be mindful of the increased debt servicing payments that will come with a larger mortgage on the property.  Here we can only refinance to 75% of appraised value, which builds in some buffer.

With respect to funding your properties out of pocket, I'd advise against settling on that as a strategy.  If you say the present property is turning a 10% return (after expenses and debt service ... or after taxes?), I would direct that 10% cash-flow into a reserve fund until it as accumulated to the point where you could carry the property vacant for 6-12 months.

Once you have your reserves built and the property refinanced, it would be a good time to take on a second one.