It’s finally done. I’ve submitted the offer, the owner accepted it. Pending the approval of my home loan, I’ve bought a house. The process has been dreadful and not one I’d like to repeat. I’m very sensitive to where my money goes and what I’d like it to do in the future. Making a decision involving hundreds of thousands of rands was never going to be easy. 

The worst part was not knowing whether I could trust the information I was getting. It’s a negotiation between a buyer and a seller, mediated by a third party who has a vested interest. I only have a superficial idea of what I actually signed on for. 

If you are about to embark on this journey, I recommend visiting the Estate Agency Affairs Board website and downloading the Code of Conduct. This document inadvertently tells you all the fast ones agents like to pull. It also gives you a sense of what you are entitled to as a buyer (and seller). I wish I read this before I started.

I made liberal use of the South African Property Transfer Guide reports. I bought four, in total. I knew exactly who the seller was, how much he paid for the unit, what the other units in the complex were going for and how much churn the complex had seen recently. It also helped me figure out the agent showing me a different unit was being duplicitous; think Photoshopped pictures and unregistered agents.

Lastly, I want to point you to the tool I found an hour too late, submitted by Adam. This company does a comprehensive inspection of the home you’re about to sink your fortune into. If you are seriously considering buying a place, pay a company like this before you commit. 

My house hunting stirred some ideas and questions for you too. In this podcast we share some tips and tricks and help a few listeners figure out how best to buy or sell.

Sally has a question about a second property. She didn’t buy it as an investment property initially, but then her circumstances changed. At first she wasn’t sure if she should keep it or sell it, but in the time it took us to get to her question, she’s had some closure.

I’ve always been of the mind that an investment in property is a good thing and never really looked into it any deeper (in terms of returns etc). 

I was mostly covering costs currently and figured I’ll have extra income once the property has been paid off. 

First, I did the Stealthy spreadsheet, with all the actual money that went in and out of this property over the years. 

The returns are sitting around 8-10%, which is not great. 

I’ve actually been extremely lucky with tenants, and had no vacancies with this place, but who knows how long that luck will last! 

Then I looked at retirement numbers. 

My cost of living with the income is lower, thus the number I need to reach is lower,  and could potentially reach it in 15 years. 

Without the income,  my retirement number is a bit higher, but without the property I would have more disposable income. If I’m disciplined, I could actually reach the higher number in just under 14 years. 

Due to the amount of money in and out of the bond, the amount of cash from the sale will not be huge, but on the plus side, I won’t have a bond to pay off.

I am thinking I may now put it on the market and buy some nice passive property etfs. I’m in no rush to sell, so that’s in my favour. I understand it may take time to sell, which isn’t an issue either. 

What do you think? Have I missed anything critical,  or do you have further arguments for keeping versus selling?

Christiaan shared a bond calculator. It shows:

• How your monthly contribution would change if the interest rate changes.
• How many times you’ll be paying the property if you just paid the bond amount.
  • 2.36 times in my case, which means if I paid cash I could buy two of those places for the price of a bond
• How additional payments would affect your payment term. For example, my planned additional payment would shave 14 years off my bond repayment.

Antoine says:

The emotional temptation of owning your own property is that it gives you control to fix broken things. However it’s not easy to deal with contractors. Although I can do a lot of these things myself, I don’t have time and it doesn’t make financial sense to spend time on these things. So in a sense I have to rely and deal with the quality of someone else’s work.

Before you buy, reframe the problem and think about all the choices you have if you want to move to a different location or province at the drop of a hat. This might help elevate the emotional anxiety. Then decide to buy a house because it makes rational financial sense or decide to just rent a different apartment. If you have a lot of time on your hands to fix things at the house yourself (and you actually enjoy doing stuff like this.) Buying and renovating might be reframed as a “second” job.

@chi_gunda and I had a conversation about what a bond does to our overall net worth. Both of us will have more liabilities than assets due to our home loans.

I listened to the Fat wallet podcast this week, couldn’t believe you were even considering liquidating your tax free account,  I kept screaming ‘nooooooooo, Kristia, don’t do it’ to myself.

Rudabager Lassie von Tigerbalm figured out a great way to consider the financial impact of buying.

I’m on a bit of a present-value mission right now. One calculation you owe yourself is to consider what the extra monthly costs of a house are worth by retirement, when adding in compound growth. That’s the real cost. At least if you buy it you know beforehand, rather than screaming into the night later.

Cliff has his financial situation completely under control and wants to know what percentage of his portfolio should go towards buying a home.

I am invested in and contribute monthly to ETFs, equities both domestic and abroad, tax free savings, an RA.

I’ve even dabbled in some cryptos. I also have about 25% in cash which I have in a money market acc that I can draw from if I see a good buying opportunity that I like.

When the day comes where I want to buy an apartment/house, what % of my portfolio should I contribute towards buying a house? 

I wouldn’t want to sell any of my equity holdings and I would prefer to buy in full with cash. 

But that would also not be a wise decision because I would be putting all my eggs in one basket. 

When it comes to buying would you recommend contributing 50% of my portfolio towards the purchase of the house and mortgaging the other 50% or putting down the minimum 10%, pay a larger monthly mortgage and have less disposable income to invest in the market every month? 

I live in cape town where the price of a two-bedroom apartment is around ~R2m. I’m also considering what Simon said last week where cash is king when buying property.

Stealthy Wealth once wrote an article about the cost of living in Cape Town. http://www.stealthywealth.co.za/2017/06/living-in-cape-town-definition-of.html

Get Down Adam, who is a doctor and apparently a late bloomer, wants to know about buy-to-let. I just want to remind Adam that people live much longer, so finding your career later in life is probably a good thing.

I come from a family where money wasn’t discussed and property is king. 

From what you say on the podcast, property is a less smart investment these days and I get that but I also HATE paying rent, even if the maths makes sense. I’m having trouble shaking the emotional connection to property. 

I have my eye on a piece of land that could potentially fit three small townhouses. 

No one else has built there because there is an issue with access, but the land borders my parents’ property and they would sell me access. The issue is the land is over-valued for something you can’t use. The seller doesn’t know that I could potentially use it so I could get a deal. I could theoretically build three, let two and live in one. 

Is this a dangerous game? I know property itself is a nightmare, but there’s a big part of me telling me this is a sneaky opportunity. 

The not-get-down Adam also wrote us about inspecting a home before you buy it. Unfortunately I got it an hour after signing an offer to purchase. 

You mention checking cracks, mould, damp etc. before buying a place. My personal experience has been to enlist the professionals here such as Inspect-a-home.

I’ve used these guys twice for both my places and I actually had their investigation as part of the “subject to” criteria before purchasing.

They do a full inspection and will identify faulty wiring, mold, cracks etc. with a neat little report that really helps.

Lesegisha once again showed us the error of our ways. In a last-minute attempt, he managed to save the Listener Love Index from pure obliteration. Here’s his argument:

• Although it’s been down 5% on average and around 10% lately, it’s still a good example of diversification considering how far down Pallinghurst and Steinhoff have been.
• Shares like Kumba that are up by really healthy margins are a good testament that there are also some good picks, which easily could’ve been missed.
• My main qualm (and lesson) is that we are killing it after just one year. Typically a market cycle lasts about seven years, so it makes sense that over a one-year period a portfolio is underperforming.

It may seem like a trivial point but here’s the magic in it.

The law of probability and averages says that the method we used will underperform over half the time and then overperform the other half, giving us an average return over the market cycle.
I concede there’s no telling where in the cycle we entered, so it could get worse before it gets better or it really could just go bad. Equally so it can shoot the lights out.

The most important variable then becomes time. The Love Index shows that by our nature we are impatient with our stock investments if we can ditch them after a year (arguably most of us had given up months ago lol), while we can put up with a bad pension fund or retirement annuity to retirement.

"I think we measured a long-distance run using a 100m stopwatch. I would’ve loved to see how the index performs over a longer period (minimum 5-7 years) and I probably will be tracking it on the side. I’m almost certain the dogs in the portfolio won’t recover but a lot of the good-ish companies will outperform the market, especially if dividends are factored."

Shortly after recording, Rudabager also made a plea in favour of our unloved index, “I think the love index was perfect. It was made up of votes from motivated investors who might imagine they have some insights. It was still a mess. That's a much more valuable lesson than it crushing the STX40 and a bunch of people deciding to put all their money on it.”

As a result we now have two competing indices. It’s been a year since we made the Love Index, so it’s due a rebalance. If we get 17 votes to remove a company, it goes. 17 votes for a new company gets it in.

The Zack One Lap Index

In this episode, Zack Bezuidenhoudt compiles an index of beauty. I use the opportunity to ask almost every index question I've had for a year. It's a wonderful time.

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The question that inspired this week’s show is one of my favourites: what exactly happens to the money when you buy a share? Who gets it? How do companies deal with shares in their books?

We talk about the mechanics of buying a share. We discuss the differences between the primary and secondary markets for shares, where the concept of share buying came from and how shares get from person to person. It’s fascinating!

Thanks very much for all the great iTunes reviews and messages of support we get every week. It’s wonderful to be reminded that our work has a real impact.

Cindy van Heerden wins for being a Van Heerden and for writing us a lovely upbeat email.

Flip, you guys. Jissie. So much love!

I have been binge listening to the Fat Wallet Show the past two weeks! Some episodes I listen to twice because they are just soooo good.

Firstly, I am so impressed with the quality of your podcast. I listen to a lot of podcasts, which are mostly American. The quality of sound, content and lekker hosts are important and boy oh boy does your show deliver. I feel happy and a little bit proud that such a top notch show is South African.

I am still so clueless about a lot financial topics, but I am slowly learning. So I don't have any questions yet (you are a show about questions after all). I just wanted to say thank you for encouraging us to do the smart thing. I am paying off my crap-credit-card debt and am putting away a R100 each month for my emergency fund until I pay off my debt and can put away more. Also, I just got an increase and instead of buying more shit - I am using it to pay off my debt faster! Yay for finances. It is all I think about since I started listening.

I think every and all South Africans should listen to your podcast. I think this is just what South Africa needs - proper education that will help our youth become money-smart.

Thank you. Thank you. Thank you!

PS - Kristia, I love your surname ;) Yours too Simon! Brown like chuckles.

PPS - I am a Graphic Designer. Don't know if you've had any of those yet.

Wim wins for taking charge of his finances in a very serious way. He already started the process of moving his RA to a cheaper provider, but he’s still struggling with that process.

Your advice on finding more places to save money has led me to stop my AA contribution of R1,300 for me and my wife. I have adequate cover on my short term insurance. My wife also has car under warranty which includes roadside assistance. That money is going into EE EFT.

Thanks Simon, upon checking my car insurance, I realized my premium of R550 on my Toyota bakkie could only pay out R75,000 if stolen - it’s an old 2006 model. Even increasing my co-payment to R10,000 only reduced my premium by R100. I decided to take only fire, theft and third-party insurance, saving R250 per month.

He made an investment in a cow through Livestock Wealth.

I always wanted to be farmer, but wasn’t born into farming, so took a fat chance. The CEO was explaining their model at Allan Gray’s investment summit. Your explanation is correct, but it also seems there is a monthly maintenance fee of R315. Times 24 (18-24 months to mature to 500kg) adds another R7,560, totalling around R16,000. IF you get selling price of  R18,500 you get around R2500 over 2 years gives you 15%.

You can actually visit your cow and get picture- im opting out on that one, keeping it strictly business. I will send you a picture of my cow, not naming it though.

Dale inspired our topic this week.

Could The Fat Wallet explain what happens, exactly, when you buy a share or a portion thereof? Where does that money actually go?

If I buy R1,000 of STX40 through EasyEquities, after fees and costs, what happens to that R1,000?

Do all 40 companies physically get paid a portion relative to their weighting?

Would EasyEquities literally transfer R240 to Naspers, for example?

If they do – how and where does Naspers account for that “income”?

Is there an item “income from sale of shares” on a financial statement somewhere? I don’t actually read financial statements (which is why I buy ETFs in the 1st place, because I don’t care to), so maybe it is there, and this is a really obvious question?

And what happens the opposite way around, i.e. if I sell R1,000 of STX40?

Home buying feedback

Deen says I should ask for a drone shot of the unit I’d like to buy to get an idea of freeway access and the surrounding areas.

Debt Lady is in a financial pickle and wonders if she should sell her house.

I owe in total of R134,000 credit cards, overdraft and loans.

I take home R26,700 per month and I am drowning.

I'm thinking of starting afresh by selling my house and take the profits and clear my debts. Would you ever advise a person to do that? After I paid everything I am left with R1,200 which should carry me through the month. It doesn’t and I still have to pay rates and buy food.

It dawns on me when you talk about property that I didn’t properly plan buying this house. It’s inside an estate where I’m paying R2,600 for two levies. I was excited about the increase I got in a new company. I bought a new car and got a new house and now it’s taking its toll on me. I keep on applying for loans to pay my debt.

Where do I start as I know I need freedom from this debt?

Hamster says buying a home can be a good financial decision, not just a lifestyle decision. He re-shared the Rolling Alpha buy vs rent calculator.  

It can be a great financial decision to buy rather than rent, as long as you apply (and stick to) a few rules, like staying in it for at least 8 years to counter the negative financial effect of having to have paid all the transfer-, financing- and lawyer fees, pay it off ahead of schedule.

Some time in the future, you'll have paid off your bond and will be living very cheaply. By that time rent will have increased (at least with inflation) to enormous amounts. Having a long-term view on property-ownership is a lot like having a long-term view on your investments.

Lastly, the freedom one has when owning a property is amazing. The day before we moved into our house, I had the garage doors automated, installed an automated sprinkler system in the garden and had a plumber come out to install a "retrofit" solar panel on our roof to assist the geyser with heating the water (our electricity bill for a family of 3 is only R500 per month).

I also installed thermal insulation in the ceiling myself and we're next going to convert the stove hob from electricity to gas. You can't do these alterations (most of them we did to bring down our long-term cost of living and energy-footprint) when you're renting. The same goes for painting the rooms the colours you like, putting up (or taking down) shelving where you want, etc.

I love the point about doing alterations to reduce costs in the future, as opposed to cosmetic alterations.

He explains the eight-year breakeven point as follows:

When you purchase a house, the general rule is that you want to be sure you’ll be in the same home for at least eight years.  Otherwise, you’re going to take a hit financially.  Why?

The first hit is your closing costs. Every time you go through closing — buying and selling — money hits the table. This can easily add up to thousands. Limiting how often you have to pay that kind of money is always a good idea.

So extrapolating the cost of closing’s impact on your return on investment, you’ll need around eight years to make up for the money you had to spend now, so that you break even with someone who rented instead. As rent goes up over time, a tenant will eventually pay more than a home owner, the break-even point typically lies about eight years into the future (assuming buying and renting the exact same property).

You take a second hit when you look at your bond statement to see exactly where your monthly payments are going. The way bonds are structured, you pay much more interest in the first few years you own a house. Usually, it isn’t until you’re about seven or so years into paying down your bond that you’ve made enough progress on the principal to make it a better deal than paying rent each month.

Note: When you take out a bond, you are paying an interest rate on what you owe. So, in the first year, when the principal is highest, the interest you need to pay is also the highest.  However, since the monthly payment is the same throughout the term of the loan (at least with a fixed rate bond), more of the payment will be used to cover the interest payments, meaning less is going towards the principal. As your principal goes down, your interest payments will go down, leaving more of your money to go towards the principal, so it snowballs nicely.  This is one way of getting ahead of the eight-year R.O.T.

If you can wait at least eight years before selling again, you’re in a better position to be ahead of the game, especially if you bought less house than you can afford and making extra payments into the bond.

To explain it a little differently, if you keep buying a house, live in it and sell it again every eight years, you’re no better off than if you just rented. Any equity you would’ve built up in the property plus money saved in the long run on not paying for rent escalations, is cancelled out by the costs incurred when buying and selling.  Even worse, if you buy and sell in fewer than eight-year intervals, you would definitely have been better off renting!

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It seems having enough money to retire is only half the battle. There are so many decisions to be made post-retirement. This is true for old school retirement and financial independence, as Alistair Hennessey’s question illustrates this week.

He and his wife have sold everything to live their somewhat odd dream of following winter around. (We strongly discourage this abnormal behaviour.) They’re both in their 30s and lucky enough to have jobs they can do anywhere in the world. Having accumulated enough assets over the years to make this possible and still earning enough money to continue investing, how would one even begin to untangle all the possibilities?

Luckily we have access to our financially independent friend Patrick Mckay, who has been thinking about his options for a while. In this episode he helps think through the Hennesseys’ options and talks about the wonders of tax-free investments.

My wife and I have sold our apartment and all our shit and are moving to Lisbon.

We’ll be living in AirBNB across Portugal, Europe and back in Cape Town, probably following the winter around.

After selling everything, they have:

Cash: R2,9m

RAs: R700,000

I think we’ll still contribute the minimum monthly amount to keep them active (about R400 each).

TFSAs: R66 000 between NFEMOM, PTXTEN, CSEW40, STX40

Currently with ABSA but soon to be moved to Easy Equities.

Going forward we will just buy STX40 and/or possibly the Satrix MSCI Emerging Markets ETF STXEMG.

ETFs: $22 000 between Vanguard FTSE Developed Markets (VEA), Vanguard S&P 500 (VOO) and Vanguard Total Market Index (VTI).

I only found out after buying these ETFs that they are domiciled in the US, which means the US tries to steal quite a bit if I die. Although this might only be when it’s worth more the $60 000.

I’ll be getting new wills done as soon as we get to Portugal.

Debt: 0

The plan

We’ll put aside cash for six months' expenses in EUR. Since selling the house we have dropped our monthly expenses by about 50%.

I still want to transfer R66 000 into our TFSA each year. If we have a ton of extra cash we might top up our RAs, but there is no tax saving with us being in Portugal, so I’m not sure it makes much sense.

He has between EUR 1,000 and 2,000 to contribute to ETFs every month.

For the ETFs, the plan would be to take the bulk offshore and buy the Vanguard FTSE All-World ETF. 

To be honest, I don’t actually know where we will be living in 10 or 20 years so I was thinking of investing mainly in EUR.

The Vanguard FTSE All-World ETFs is domiciled in Ireland, which means that everything can happily pass to my wife without too much fuss when I die. Portugal also has some great tax savings around offshore dividends.  

But this ETF has an expense ratio of 0.25% (The Vanguard ones have 0.04% and 0.07%)

Assuming my maths is right, on a 200 000 EUR portfolio the annual costs would be:

0.25% TER is 500 EUR

0.04% TER is 80 EUR

So over 10 years, Vanguard all-world needs to do 12.5% annual return to keep track with the S&P 500 ETF just doing a 10% return.

Over 20 years the all-world (VWRL) needs to do 14.5% annual return and the S&P 500 (VOO) just 10% to get to the same place.

In summary:

6 months worth of expenses in EUR for an emergency fund

Rest of the cash into either:

VWRL (EUR) and VWRD (USD), Leaving what’s currently in VEA, VOO & VTI

Keep adding to VOO and VEA (and not die before my wife)

Every year add 33k ZAR each to our TSFAs STX40 & maybe STXEMG leaving what’s currently in NFEMOM, PTXTEN, CSEW40, STX40

Leaving RAs intact (sigh)

Our friend Jo wrote in for the first time in a long time!

My TFSA is in cash. And has been since it started. Let me lay out my logic for you.

When TFSA came out, I decided markets 'felt' expensive. I know, super subjective, but TFSA has quite a long horizon. At R30,000 a year it just didn't feel amazing me to me. I think you'll do okay with a TFSA, but it won't make you insanely wealthy.

As it turns out I've made about the same return in cash as I would have buying DBXWD or a some local top 40. Which wasn't guaranteed. Markets could have done amazingly and I would have had to eat my words. Theoretically it could have also gone the other way.

I'm keeping my TFSA in cash for the time being. I'll add  my emergency fund to that and wait for the next big sale/market correction. That might not happen for a while, or it could happen next week, but at some point it will happen.

For example, the PTXTEN 25% down? I took my daughters TFSA and I bought a great big chunk of that particular fire sale. Thank you.

You could argue I'm trying to time the market, but this is all still ancillary to my other normal investing - you know, dutifully plugging away into my ETFs every month. I see my TFSA as a kinda hedge bet and am happy to play a little loose with it.

Not for everyone. But you know, just thought I'd posit an alternative.

Paul has a question for Patrick.

Would you please ask Patrick what he buys in his TFSA account?

I know he's a one etf guy, but I believe he buys a local equity only etf in his TFSA to avoid foreign tax.