Wealth Plan Newsletter – Vol 1

By Wealth Plan

A MESSAGE FROM OUR CEO AND FOUNDER, JACQUES FOUCHÉ

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Thank you for being part of the IGrow family. We love being able to share our investment strategies and best practices with you, especially in our many live seminars and one-on-one strategy sessions.

I have some incredible and exciting news to share with you: the IGrow team of experts has created the IGrow Wealth Plan that is transforming property investors lives. In my opinion the best in the world and I want you to be part of it.

I started the IGrow Group of Companies in 2006 with one objective: to change the lives of South African investors by assisting them to create wealth and financial freedom for themselves.

It came about due to the flawed way of planning one’s retirement in more traditional investment vehicles such as pension funds and retirement annuities. This concept of retirement planning – namely saving a percentage of your income each month for decades with the hope that you acquire enough wealth at retirement to provide a pension - did not make sense to me.

The reality is that with this model so few South Africans are able to enjoy retirement. Frequently they have to either downsize their homes and lifestyles or sell off their assets to keep their monthly expense as low as possible. This is due to insufficient capital invested over a person’s life meaning they are not able to generate adequate income at retirement. This often results in them either relying on children for financial support, reducing monthly expenses or working part-time to supplement their retirement income.

Let’s look at a case study

John Appleseed, a 45-year-old investor, would like to retire in 20 years’ time. He would like to retire with an income the equivalent of R50 000 per month in today’s terms, and this income needs to last at least 15 years once he starts receiving a pension.

If we use an inflation rate of 6% and a growth rate of 12%, then the investor will require capital of approximately R19 422 617 by the time he reaches the age of 65.

Why such a large amount?

The R50 000 today is not the same income 20 years from now. With an inflation rate of 6%, the income he will require will be R160 356 per month. The buying power of R50 000 has to keep up with inflation so the future income needs to be taken into consideration.

The future monthly income of R160 356 will need to increase each year in retirement in line with inflation, and must provide this income for a minimum period of 15 years.

So, we now know what capital the investor will need in 20 years’ time but how much must he invest today in order to achieve this income goal at retirement?

With an annual compounded growth rate of 12%, he will have to invest R19 439 per month for 20 years. If the investor’s current gross income is R50 000 per month, then he will have to invest 39% of his income to ensure he can retire in 20 years’ time with the same buying power that he has today.

Most people will, unfortunately, not be in a position to do this as they do not have the disposable income to invest. This is the case for millions of South Africans.

So, if the investor in this example cannot afford to invest the required capital each month, what options does he have? He can either:

  1. postpone retirement to the age of 70, which reduces the required investment to R10 344 per month. He, however, has to work an additional five years before he goes on retirement.
  2. reduce the desired income at retirement to R35 000 but still be able to retire at the age of 65. This will result in a lower amount he needs to invest each month to R13 607.
  3. reduce the monthly income at retirement to R35 000 and retire at the age of 70. The monthly investment amount he needs to invest will therefore reduce further to R7 241.

The above options are typical of what a financial planner will advise an investor as it all comes down to compound interest and time. The investor can opt to take on higher risk by trying to achieve a higher investment return. In the above example, if the growth rate was increased to 15% per annum, the monthly amount needed to be invested reduces to R10 748.

But there are very few traditional investment vehicles that will achieve an investment return of 15% per annum. An investor will have to take higher risk in return for higher reward but it may not always the most suitable route due to market performance and volatility.

This is where IGrow can help, by educating and helping investors achieve financial freedom - and it all starts with having a sound plan for attaining that freedom.

Investing in property through a gearing mechanism called bond leveraging allows investors to contribute less but achieve higher investment returns than traditional investment vehicles.

Banks provide loans to acquire property but do not provide loans to invest in shares, unit trusts, retirement annuities or endowment. This creates an advantage: investors can acquire properties for the purpose of renting them out. The income from these properties pays the property costs until the bond is paid off and creates passive income prior to retirement and income in retirement.

Using the same retirement objectives as those in the example above, the investor could acquire properties and contribute less of his disposable income per month and rely on the geared property to yield the necessary return to retire with the equivalent of R50 000 per month in 20 years’ time.

If the investor only had R6 000 of monthly cash flow to invest, the growth rate required would be 21.56% per annum to receive R50 000 at the age of 65, increasing to match the rate of inflation at 6% per annum. This return is not possible in traditional investment vehicles unless you are willing to take the risk off offshore exposure. Offshore investing is an aggressive investment approach as you are exposing yourself to foreign risks such as political and economic uncertainties as well as fluctuating currencies.

How to achieve this return with property

Let’s look at a practical example and examine how many properties you will need to get the required rental income at retirement, and how this is achievable through the purchase of the IGrow Wealth Plan.

An investor has acquired five properties in one of the developments we are selling in Port Elizabeth, called Fourleaf Estate. Based on the client’s income and affordability, he qualified for 90% bonds on all five Fourleaf Estate properties. The client therefore put down a R329 000 deposit (R65 800 each) to acquire a property portfolio worth R3 290 000.

The investor’s risk is reduced as he is only putting down one-tenth of the opportunity cost, but will receive the growth on the market values of the properties.

Based on the assumptions used, the monthly shortfall in the first year is R3 575 per month, which reduces per year until the breakeven point is reached.

Cashflow analysis of the Five properties acquired at Fourleaf Estate:

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Using the IGrow Wealth Plan, we can use the property data to track current performance as well as income trajectory each year until retirement and beyond. This is important, as investors would want to know what the nett rental income is at retirement in comparison to the future monthly desired income of R50 000 per month.

Using the current projections, we can see that the Internal Rate of Return (IRR) over the next 10 years is 28.1%. This means the initial deposit of R329 000, as well as the annual cash flows, are taken into consideration, and yield an annual return that is higher than that achievable through traditional investment vehicles. This is due to the banks funding the properties through home loans and the tenants’ rent being used to pay off the loans.

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Refer to the IRR arrow below:

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The IGrow Wealth Plan is designed to track property performance as well as rental cash flows and match the trajectory of income required at retirement. Using the projections on the five Fourleaf Estate properties (as show in the table above), we can see that over the 20-year bond terms there will be a replacement ratio of 61.3% which increases each year due to the escalation in rental income. The market value of the property portfolio will be R24 346 822 in the year John turns 65 if the properties have a consistent growth rate of 10% annually.

In summary, over this investment’s term leading up until retirement, John put down a R329 000 lump sum and occurred a total nett cash flow of R4 558 036 even before he retired at the age of 65. In the year of retirement, the market values of the properties grew to R24 346 822.

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Extract from the Wealth Plan that tracks the future rental income against the desired income at retirement:

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It is also important to remember that, during the 20-year period leading up to the retirement age there is surplus cash flow being generated once the properties breakeven and the income begins to exceed the properties’ expenses. This is illustrated on the cash flow analysis table.

This surplus cash flow can be used to acquire additional properties, shorten the existing bond terms through a process called amortisation or even to reinvest into other investment vehicles where it can earn interest.

The investor did not have to save R6 000 per month for 20 years at a rate of 21.56% to achieve the required future value at retirement. This is why it is critical to have a plan to refer to and review so that you understand all the available options.

Investing in property is not a short-term, simple process and is often considered too daunting by first-time investors. With the various property investment companies within the IGrow Group, we can guide and assist you in planning for retirement, by managing a profitable property investment portfolio and business.

A financial needs analysis provided by other financial service providers does not take into consideration the rental income cash flows at retirement, nor how the property is performing in your portfolio. This is why the IGrow Wealth Plan was created. It incorporates these factors as part of retirement planning process.

The plan can assess and provide a comprehensive report on both an investor’s traditional investments and existing properties, and track the rental cash flows up until retirement as well as in retirement to see how your properties can provide income on which to retire.

Anyone can start a property investment and take advantage of gearing and leveraging to build up a portfolio that can supplement pensions, and help them retire financially free.

This is your time to strategically build your retirement savings through investing in property. Within the IGrow Group we have the holistic team of experts to help you achieve financial freedom.

Invest strategically, invest intelligently, and become financially free.