The Formula For Riches and Property by Gletwyn Rubidge and Chevonne Bishop

Application of the Formula for Riches:

Here is our story of how my wife and I purchased two properties and how we applied the formula for wealth to make them efficient investments.

There are two parts to this story:

Part A
In July 2003 my wife and I bought a house on auction for R225k:
Costs 30 k include transfer, auctioneers commission etc. the rest was covered by a bank loan. We decided not to put down a deposit so as to preserve capital. The 30 k was take from our access bond of our home, this borrowed money actually cost us R 300 per month to pay back to the bond. We saw this as reduced risk in that property is fairly safe as an investment and by using the 30 k from the bond we were basically paying R300 back per month for the use of the capital.
We loaned 40 k from the bank to make a few alterations that would help boost the rent to make the purchase more efficient. The alterations included converting a garage and outside room to a flatlet. This would, we reasoned, give a positive cashflow for the property.
We tenanted the house in September covering all monthly costs including the bond repayment and making a positive cash flow of R740* every month. These tenants were carefully screened by us to reduce risk of nonpayment. They paid on time and did not move making our life simple.

*If we include the cost of the capital borrowed from our own access bond then the house was making R440 per month. Basically we were being paid R440 per month to own the house. The only real cost was the time and effort required to get this project done.

We put a security fence up at the end of the second year - cost of about R6500 which neutralized our rental profits for that year.
After 3 years we received an offer of 980k for the place.

I calculated the growth by internal rate of return(IRR) and capital growth:

For the sake of calculating IRR I used an expense of R500 and came up with 22860% - a stunning twenty two thousand eight hundred and sixty per cent. The smaller the figure of you capital the higher our IRR goes.

Calculating the capital growth on the capital we used over three years (and those were very good years of capital growth for property), as well as the growth per year:

We subtract the amount owed to the bank from the amount offered to us for the property and divide by the capital used to cover costs – nb no deposit.

100% x (980-265)/30 = 2383% over 3 yrs; and average 794% over each year.

These values are a little better than the banks offer. The best growth I ever had in a paper asset was 14 %! Our was 56.7 times better!!!

We would still have to pay capital gains tax on the profit, if we sold.

Anyway, we decided not to sell and kept the property - the offer of 980 k was from a developer. We are now negotiating a deal where the developer plans to develop our property with another 8 neighbouring houses. We now stand to receive three very up-market units in exchange, and our rental loss is covered by the developers during the development period. So we could have had the 794% growth, but rather opted to increase our capital growth by another 40-60% by getting three units as well as increase our rental income by about 40%.

As you can imagine there are now a number of possible options:
Sell and have plenty of cash to do up our own house, buy a car, go on holiday, reinvest in other properties, or as we plan to just grow the investment further. The latter option will be very economical on time as we are not involved in the work part of the development.

So the bottom line is that our time and effort were extremely efficient “work”.

Part B

The actual growth depicted above may be a bit more when you consider that we took our first years profits R440 per month) and went house hunting to a somewhat degraded area of town where bargains that pay for themselves could still be had.

An estate agent showed us a house and after doing our calculations we could not cover our costs on the one we viewed so we told him it was not suitable and asked what else he had. He said: “There is another one, but it is a really bad one.”

“Show us now!” we smelled opportunity.

We got there and found a real horrific mess of a house, put in a low, risk reducing offer of 53k and it was accepted. We loaned 40 k from the bank, did up the little place(adding value hence dropping risk) and put in a tenant that not only covered the bond but also made a neat little net profit of R540 per month. So for a low risk we got paid. It presently makes about R650 per month and has increased in value to R350k in three years. All it cost us to create this monthly profit (and capital gain of: 350 – (53+40+5) = 252k) was the ~5k used to get the place in our name and the bond registered.

Our net growth from a capital gains point (growth on our capital used) of view was 100*(252/5) = 5040% over three years = 1680% per annum. We love the leverage.

In actual fact we did not really pay 5k of our capital because we used the rental profit from the first property (R440 per month for five months = R2200) to fund some of the 5k of capital.

So recalculating:

100*[252/(5-2.2)] = 9000% for 3 years, this equals 3000% capital growth per annum for each of the three years.
As a matter of interest if we paid the 40 k out of our pocket the growth would have dropped to 196% still good but a far cry from the 3000% we obtained.
If we paid cash for everything the yield would be 88 % per year.

The internal rate of return was 8516%. Again, a splendid growth due to the slender use of capital.
Let’s say we worked hard protecting the sacred capital and only spent R5 then the IRR would be 4813538%. OK, too many numbers: 4.8 million percent.

Re-applying these principles to other properties similar to these could lead to a snowball effect of wealth creation.

In summary, we used:
little capital,
low risk,
leverage of the banks money,
leverage of what the properties offered beyond their initial appearances,
personal control of our asset

You won’t know if you don’t try!

Gletwyn Rubidge and Chevonne Bishop (Bishop and Rubidge Properties)