Cash-flow from small apartment investments

[Stephen Asherson]

Hi guys, love the site and all the info/resources/help that is available here.

Short summary of my situation:

- Complete beginner with real estate. Only just starting to learn about what is involved.

- Looking at small (1-2 bed) apartment investments to rent out / let.

- Live in South Africa (Cape Town).

I've been reading about important aspects to look out for with this type of property investment and seen lots of discussions regarding the 1% rule, being cash-flow positive and debates around initial down payment. While trying to get up to speed with all of this, I've also been watching the property market and going out and seeing a few places for sale as well to get an idea of what is out there.

I've done the math with a lot of existing properties (even very cheap properties in less affluent areas) and I just can't see how I can apply those rules in my situation. For instance, take the below examples:

Currency: ZAR (R). Exchange:+- 13.5 ZAR : 1 USD

Prime lending rate: 10.5% (we have relatively high interest rates here)

Mortgage terms: 30 years

E.g. 1

Property price: R795,000 (cheap 2 bed in cheap area)

Down payment: 10% (R79,500)

Mortgage repayments: +-R6,500 p/m

Lease/Rent expectations: +-R6,000 p/m

Monthly expenses: +- R2500-R3000 (I've read somewhere that a quick rule of thumb for long term is just to use half of gross revenue. This includes the rates/levies and any maintenance over the long term).

E.g. 2

Property price: R1,500,000 (1-2 bed in a more upmarket area )

Down payment: 10% (R150,000)

Mortgage repayments: +-R12,300

Lease/Rent expectations: +-R10,500

Monthly expenses: +- R5000

I'd be net negative cash-flow in both cases.

Perhaps my monthly expenses estimate is inaccurate? But even so, just taking the lease/rent expectations vs. the mortgage repayments, how could one in this environment hope to be cash-flow positive from the outset or even use the 1% rule? I understand that a larger initial down payment would reduce the monthly mortgage costs, but that just means I forgo more cash upfront which still factors into cash flow. I also understand that value appreciation also plays into it, but I'm removing assumptions about appreciation and just looking at a cash-flow point of view.

Is this just a matter of not finding a good enough deal yet or perhaps the market conditions are just not that great for buy-to-let? It's also possible that I'm just missing something as I am very new to all of this :)

Feedback & comments highly appreciated. Thanks.