July marks National Savings Month and we interview a reader who made small everyday savings to create enough capital to start a property portfolio, writes Maya Fisher-French
At the beginning of this year, Honey Hindoga wrote to City Press to say that, by following our weekly money tips, he had managed to save R100 000, which he was using to buy his first investment property. His plan was to provide decent, low-cost accommodation for rural and migrant South Africans looking for affordable single backyard rooms to rent close to their work in Johannesburg. “This market has no intention of owning property in Johannesburg as they have families back home,” wrote Hindoga.
Six months later, Hindoga has begun to implement his plan and is already generating more than R19 000 a month. Once his debts are paid off, this money will be free cash to provide him with an income, although he has further plans to expand his rooms-to-rent business, which he estimates will be earning a net profit of more than R23 000 per month by 2020. How he did it: Hindoga had already turned his existing home into a cashgenerating asset by renting out four rooms to tenants. He used this rental income towards saving for his investment property.
“The property is in a black township and not far from an informal settlement but very close to two main shopping malls in the East Rand, which makes it very attractive to people who are looking for accommodation to rent,” says Hindoga.
Of the R100 000 he had saved, he used R40 000 as a deposit on the R400 000 property, kept R25 000 for bond registration and transfer costs and put the rest towards starting his building extension project.
His mortgage repayment on the three-bedroom investment home is R4 200, but Hindoga did some door-to-door research and found that he could easily cover this mortgage by renting out the existing rooms in the house.
His big idea was to use the large space at the back of the house to build 10 single rooms with built-in toilets, showers and dish sinks to make them secure and unique.
More door-to-door research, which involved talking to other landlords in the area, established that he could rent these rooms out for between R900 to R1 300 per month. Hindoga based his affordability calculation on a rental income of R1 200 per room and on this basis took out a R230 000 personal loan to complete the buildings.
“Personal loans are very expensive but I had no choice as banks seem reluctant to finance building loans and they are such a hassle. This is what I find very challenging when investing in township property.”
Hindoga was immediately able to rent out the main house, which covered the mortgage bond on the investment property. In May six rooms were completed and immediately occupied. Due to the huge demand, he was able to charge a higher rental than his original calculations, receiving R1 350 per month for five rooms and R1 450 for the larger room. His rental escalation is R50 per year.
“My tenants pay their own electricity. All rooms have prepaid electrical meters, builtin basin, toilet, bath facilities and kitchen sink. My friend calls them apartments because they are fully equipped,” says Hindoga who was amazed at the huge demand for single rooms in the area. “People still call me to this day, looking for accommodation.”
All the income from these rooms goes to pay off the mortgage and personal loan. He also still receives rental from the rooms in his residential home. That, together with the R3 000 that he is able to save from his salary each month, will allow him to pay off the personal loan in the next two years. Once that is paid off, Hindoga will be generating a net profit of R18 000 per month off both properties. However, he sees this as an opportunity to expand further.
Although Hindoga is generating enough cash at the moment to apply for another loan and start construction on the next five rooms immediately, he is worried about overextending himself. By waiting until he has paid off the loan on the first six rooms, he will be able to build with cash and no debt.
“I will build the five rooms by the end of 2019 so that by the end of 2020 I’ll buy a third house to expand my rooms-tolet business,” says Hindoga, who estimates that by 2020 he will be earning a total of R23 500 net profit after the mortgage payments. “I’m aware that this won’t be easy to achieve and it will require financial discipline and intelligence.” Advice from Hindoga to other budding property entrepreneurs: “As I read in City Press, it is very important to buy property in a good area near shops, restaurants, schools, shopping malls, industrial areas.” Hindoga did a great deal of research before he invested, he understood his market and what he could realistically expect to receive. By providing cost-effective, decent accommodation he is building himself a passive income while contributing to alleviating the housing shortage. It is this type of entrepreneurial activity that South Africa needs.
Hindoga’s money tips