Lets work the numbers - Ponte

I said before that I prefer to invest for cashflow when looking at properties. Property is an easy way to get rich at medium speed but its important that the numbers should be right, every property should be looked at as you would a business and when doing so there are some very important things to consider:-

1. Will the business/property give me a profit/money in my pocket from day one?
2. If not how long will it take to reach breakeven point?
3. Do I have enough extra funds to carry the business/property until it reaches that point (where it can pay itself)?
4. In the case of property - is it in an area where i can expect a good rental demand for the property?
5. what are the long term prospects for the property/business?

With regard to the ponte property it will not be profitable from day one when looking at the apparent numbers, the unit i booked costs 750 000 (I'm not saying what currency), the rental expected is approximately 7750, the levy will be about 800 and if i get it fully financed the instalment will be approximately 8200, lets look at that more clearly:-

Rental income from the unit: 7750

levies: -800

Instalment: -8200

Shortfall: =-1250

which is equivalent to 15 000 for the year, so why in my right mind would i take this property, well for one, if i were young which i am i suppose i could fund the shortfall from my other businesses but there is another reason, because the building falls in the urban development zone i can get an accelerated depreciation on this building of 20% of the refurbishment cost (1/3 the price) in the first year and 5% for every year thereafter for 17 years, that would in effect reduce my personal income tax bill as follows:-

1/3 of 750 000 = 250 000

20% of 250 000 = 50 000

considering a tax rate of 35% = saving of 17 500 less the original shortfall of 15 000 leaves me with a positive cashflow of 2500 in the first year.

in the second year my yearly shortfall (with a 10% rental increase) would be -6768 and the tax saving 5% of 250 000 = 12 500 * 35% = 4375 which leaves me with a shortfall of -2393 less the 2500 of the previous year = 107

What this essentially means and why i prefer cash flow positive properties is that they pay themselves.

Creating wealth through property is the easiest and most assured way of becoming rich and financially free, just make sure the numbers are right and your financing is halaal. Some people say they would rather pay cash and i would say to such people that it is okay to pay cash but then you lose out on leverage, if you had the cash why not put down 10% deposit on 10 of these properties and secure yourself an income for the future, as Muslims yes we should be ready for death should it come any moment but that definitely does not mean we should not prepare for the financial safety of ourselves and our families should we live to see it or worse leave nothing behind for them when we leave. One category of martyr in Islam is he who passes away while striving in pursuit of halal sustenance so that his family does not have to ask from others.

May Allah assist us and guide us. Ameen.

(I share this in the hope that others and myself will learn the important lessons of wealth creation and Islam's view on it that we rarely learn elsewhere)