Lesson 2: Falling in love with property and business
On the 1st August 2005, while I was London, I got a call from my mother to say that my father had passed away. He was only 59. After struggling to get a flight, I finally arrived home in South Africa and, as the oldest son, it fell to me to take care of my dad’s affairs. I had no idea what I was doing, but with my uncle’s help we managed to straighten everything out. During this process, we discovered that my mother would be receiving a pension payout of R480,000. Remember, in 1995, my dad’s retirement fund paid him R500,000 and so, over a period of 10 years, the wonderful “experts” on the stock market had not only FAILED to grow his wealth, but also had shockingly managed to reduce the capital amount by a staggering R20,000.
I wrote an article a month after my dad died to try and explain to people why I believed so much in real estate. I had already fallen in love with property – it just made so much more sense to me than blindly trusting a bunch of brokers with my money, to be invested in an inherently unpredictable system over which I have no control. And, I had enjoyed a good measure of success in property because, when others wouldn’t, I thought outside the box and used my unique skills to create value, which is something I don’t believe is possible on the stock market, unless you learn to master it like my uncle has done.
I showed people in my article what would have happened if my parents had bought property instead of putting the R500,000 into the stock market. This was based on long-term trends over the last 30 years, where property in South Africa has grown by 12% a year and earned a net yield of 8% each year. If they had bought five houses and put down a deposit of R100,000 on each one (in 1994, the average price in South Africa was R166,889, according to the ABSA Housing Index on the 31st of December 1994), their loan-to-value ratio would have been 40% – very low in risk – which would have created a scenario in which the monthly rent would have covered the mortgage payments and then some.
Let’s for argument’s sake say that 1995 was a cash flow neutral year (it would actually have been R2,935 positive, but let’s be conservative). After 10 years, after all expenses and interest, each property would be earning R107,115 per year. Now, if you have five properties, this translates to R535,573 passive income per year, more than the initial capital invested in early 1995. Add to this that, according to the ABSA Housing Index, on the 31st of July 2005 (the day before my dad died), the average house price was R708,542.
What this means is that each house would have equity over and above the initial R500,000 of R541,653 per house… a total amount of R2,708,265 in total. Rather than the PALTRY R480,000 that was returned with no passive income, my mother could earn over R500,000 a year by doing nothing (management fees are included before the net return) and have R2,7 million in equity and the original R500,000 invested. A NO BRAINER!
It has been more than 12 years since my father passed away and my mother is really concerned about money and about whether she has enough for her future. If she still owned those properties, rather than investing it in a pension and the stock market, she would be earning a passive R2,091,408,765 a year after all expenses and in two years, the loans would be fully repaid. She would also have R5,346,055 in equity in the five properties.
Now you understand why I have fallen in love with real estate and why I am so passionate about business. It yields real wealth. This is why I have dedicated my life to mastering both skills for myself, my family, and anyone who is important to me.