Making money, 2 ways to do it!

Three if you combine the two. The first one is to sweat your time, the other is to sweat your assets. All of us know the first one. This is when you get up in the morning and get paid for your time. This method can also be called the "active" way. Then there is the other one. I prefer the other one because with this one you do not have to get up in the morning. It is also called the "passive" way.

Usually one has to start with the one where you get up in the mornings for a couple of years and get paid for every hour you spend at the office. Eventually you will have enough money to buy a car, a house and some personal goods. Hopefully after doing this for a decade or two you will have no more debt and your house, car and other stuff will be all yours.

This is the time where you can start "sweating" your assets. What I mean by this is that you make money by using your "productive" assets. There are more than one way to do this and the most popular way is to use your house as collateral to borrow money from the bank. You can then use the money to buy some other property and rent it out, As long as your rental income after costs and taxes is more than the interest you pay the bank, you have created a "passive" income which you would not have had if you just lived in your house.

Another way is also becoming very popular and that is to rent out a portion of your existing house. This will usually entail converting an extra garage into a flatlet or adding a small kitchen and bathroom to a large bedroom/lounge area.

Let's say for argument sake that I have saved up R300 000. So in the bank I will get about 5% interest on this saving. If I have a single story house and decide to build an additional room onto my double garage, the new area will be 36m2. Now 36m2 is a very comfortable size for a studio apartment and building costs in SA is currently around R7 000 per m2. So the cost of construction will be R252 000.

Now it is important that you live in an area where there is a need for cheap accommodation. In my area a self-contained studio will go for R2 500pm at least. So your rental income will be       R30 000 per year. If you convert that to a percentage return on investment you get to 11.90% which is more than double what you would have earned if you kept your cash in the bank!

If you swing the above example around where you move into the flatlet and rent out the rest of your house, the return on investment can increase a lot because for the same cost you can earn a lot more. If you can get R10 000pm for your house, the return on the R252 000 investment would be 46.62%. The drawback is that you move from a large space into a small space. Perhaps the way to go is to ask R5000pm but rent the house as a "shared" space where you can still access the garden, kitchen etc but you have you own private studio. The return on investment is then 23.8%.

Play around with the numbers. Just make sure that you do not overcapitalize. If you have to sell your house one day you still need to be in the market range for similar properties.