 Petriol is going up, the price of food is going up. The cost of living in South Africa is becoming even more expensive. Tonight we talk inflation and how that impacts your property investments. This is the Private Property Podcast. My name is Dummi. Thank you so much for joining us. Tonight I talk to a specialist investor and a property motivational speaker, Lawrence Bowe, who is from Ripple Invest. Lawrence is going to be talking to us about how inflation can impact the property sector. If you have any questions, remember to interact with us because we are live and send those green hearts coming through and make sure you mark the register. Lawrence, good evening and thank you so much for joining us. Awesome. Too many thanks for having me, man. It's a pleasure to be on another show and interesting times we find ourselves in with this overarching narrative of inflation, which I think is quite scary. Sure. Yeah. Very interesting times. And for an investor, someone really, really wants to hear what we are talking about tonight. Let's talk a little bit more about Ripple Invest and what you guys do there. If there are specific things that you are specialists in and I know that you spoke a little bit about being a specialist investor. So let's talk a little bit more about that and how a typical day in your life looks. Sure. Yeah. So my journey started off in corporate. I was about two or three years into corporate and unfortunately I was retrenched. And that's when I realized having one stream of income is very risky. You have one person that if you do a mistake or they don't like you anymore, they can strike you off their employee database. So once I was let go, that's when I founded Ripple Invest that was about 10 years ago. And the idea behind the company was to buy cash flow positive properties, build a portfolio and then essentially live off that income so that I didn't have to rely on a job or a salary to be able to cover my bills. So my focus is on low income multi multilet and commercial properties. So I focus on areas like Hillbrow, Berea, areas within the Joburg CBD. I buy flats there, rent them out for positive cash flow. And then in the south of Joburg, I focus on blocks of flats in Rosettaville, Kenilworth, Forest Hill. And essentially there's a there's a couple of guys with within my team. And we're a small agile entrepreneurial spirited company focusing on building wealth through property investing. So an average day for me, I maybe don't work that hard. I spend maybe two or three hours per day on either finding new deals or managing my current portfolio. But the nice thing about property is that it's quite a passive income stream. On the side, I am still fully employed. I work for a US based equities firm as a cybersecurity analyst. So that kind of pays my bills. And then I focused on my property business, which is my side hustle, which will eventually take over and be my main source of income. I'm also a bit of an influencer, I guess you would say. I've got a YouTube channel where I share my insights on the property market. I'm also a published author and a property coach. So quite busy with a whole bunch of different things. But my normal day would be focusing on closing deals and finding capital to make deals happen. Let's speak about commercial property and the market in terms of commercial property. And how that looks, a lot of businesses are changing. The landscape of businesses are changing. Their business models are changing because of COVID-19, unfortunately. And how is this market looking currently? And what are we seeing as trends happening currently and maybe foreseeing for the next quarter of 2022? Yes, I think commercial was most knocked by the COVID story. The working from home and businesses just couldn't justify paying for expensive office space when no one was using it. Another trend that we saw was a big drive to the coastal regions. People living and working in Hauteng. And the reason they're working in Hauteng is proximity to town, proximity to their office place. Because of working from home, most people immigrated to the Western Cape, to the Eastern Cape, to the coastal lifestyle. So we saw a massive influx of demand into the coastal regions, pushing the price of residential properties up significantly. And now that COVID is kind of a thing of the past, and more and more companies are starting to expect workers to come back into the office. And we saw Tesla, the biggest company in the world, or one of the biggest, where Elon Musk said, everybody has to come into the office or they're fired. And I think that's going to become a more popular narrative. And that's going to drive people from the immigration coastal lines back into Inlands because they need to go to their jobs and they want to be in close proximity. So I think that was one of the trends that we saw. The next trend is inflation. I think this is going to have a massive impact on the property market, on both commercial and residential. There's going to be an increase in interest rates. I predict probably 0.5 to 0.75, that's what the US is tracking at. And what that means for the property market is that a lot more, a lot less credit is available and a pinch on the consumer's pocket. So it's going to be harder to pay bonds. It's going to be harder to pay rent. It's going to be harder to pay for petrol. It's going to be harder to pay for all these things because inflation, well, that's what it is. It's an increase in living costs. Sure. And the TPN Credit Baru suggests that Western Cape has most of commercial properties or commercial leases that are in good standing. Tell us a little bit more about this. And why do you think this is? Yeah, so good standing for those who don't know is the percentage chance of the tenant paying on time or being within a good payment behavior. The areas that I focus in, your lower income in a city markets tend to have a higher delinquency or higher vacancy rate than your upper affluent areas. So I think the drive to Cape Town and Western Cape being the leader when it comes to this vacancy rate is just, again, it's the drive of COVID and the inland is immigrating out into the coastal lines. So there was just a huge demand for properties in the Western Cape. And when there's more demand and little supply in vacancies is not an issue, then your occupancy rate's really high. The opposite is also true. Once you have too much supply and not enough demand, you don't have enough tenants. You know, that's when your vacancy rate tends to see an increase. Sure. You spoke a little bit about how things are becoming more expensive, of course, because of inflation and rent and getting a mortgage is more expensive. Talk us a bit more or talk us through a bit more in terms of what happens, the actual challenges that arise from there and what one can do in order to protect themselves from it because there's a possibility of these things happening. So a property investor or somebody who's watching tonight would want to prepare themselves for this. So how does one do that? Well, the first thing that you can do is especially if you're a property investor is run your numbers using a prime interest rate plus 2%. So currently, prime is sitting at 8.25. That's the lending rate at which the banks give us as landlords, investors, funding or finance. So when we were before COVID, the interest rate was hovering between 9 and 9.5. That was prime. Then COVID hit the South African Reserve Bank, reduced the interest rates in order to stimulate the market because there was a drop in productivity. There was a drop in GDP. And now we're starting to see a recovery, which means the South African Reserve Bank, instead of lowering interest rates, they're now going to increase the interest rates to fight inflation. That's the lever that the South African Reserve Bank has. They can either increase interest rates to tighten the economy or they can lower interest rates to stimulate the economy. We've had too much stimulus and now we're in a situation where there's high inflation. So what's going to happen? Things are going to get more expensive. Your bonds are going to get more expensive. Your car loans are going to get more expensive. Your credit cards are going to get more expensive because there's going to be an increase in the interest from the South African Reserve Bank and that filters into standard bank and that then ends up affecting you the consumer. So what can you do? It's a tough one. I mean, it's not really that easy to go to your boss and request a higher salary. Although that's going to be the reality for some of us is to go and fight for an increase in salary because inflation has eroded what our buying power is. What I would definitely recommend to every South African out there is to find multiple streams of income, whether it's to consult and contract your time out because you've got a specialist skill, whether it's to do property or stocks or crypto or any kind. You need to find other income streams, not just your job because inflation is not going to go away and your buying power is diminishing. So you need multiple streams of income. And the multiple streams of income, the only way that an investor could do this because then the impact of inflation means probably for them that they're not able to invest as much as they could before. Does this also have a ripple effect in terms of tenants as well? Yeah, so your tenants also have debt, right? So with increases in interest rates, your debt payments go up. So if you've got an Edgar's account or Willie's account, if you've got a credit card account, with inflation comes increased interest rates and that's going to affect the tenants, it's going to affect the landlord, it's going to affect every South African. I think what's going to be interesting in the property landscape going forward is that there were a lot of people that bought into property when the interest rates were really low. If I think of the beginning of COVID, March, April, 2022, we had interest rates of 7%. You know, that's really cheap. So a lot of people came into the market. A lot of first-time buyers, a lot of people came into the property market which stimulated growth and people bought properties that they probably couldn't afford. And now when the interest rate goes up, they're going to struggle with bond repayments. There's going to be more defaulting, there's going to be more distressed sellers coming into the market. You said in the beginning, are we going to see a property crash? I'm not sure if crash is the right word. I think this was really predictable. I think we're going to see 9 to 9.5 interest rates as our prime ending rate come back pretty soon in the next year, year and a half. And I think the people that didn't budget their numbers and took debt only because it was cheap and didn't forecast that it was going to become more expensive or going to be stuck. Sure. And you know, we're talking the shocking truth. Do you think there is any way at all that the impact of inflation on the property market could be positive for whichever player? If there's a player in the space right now in the sector that could say, this is an advantage, this is an opportunity for us to take and grab with both hands. 100% when you've got distressed sellers in the market, that's the buyer's dream. What's going to happen now is we're going to have a lot of sellers flood the market and a lot of distressed properties at discounted prices. So those investors who have saved some capital are in now the prime position to make good purchases. There's a saying that says, I think it was Warren Buffett or someone that said, more millionaires are made during recessionary times. As long as you've saved capital, you'll have opportunities to buy things at discounted prices. You know, if we look at the stock market on currently, there's been a massive crash. Since January of all-time highs to now six, seven months later, most people's portfolios are down 30%. So the question is, when is the opportunity? The opportunity is now. These properties are now being sold at 30% what their all-time highs were. Your whole property economy is pretty resilient in South Africa, I would say. From all the data I've seen from TPN, we're very much on a recovery from COVID. So all of the negative side effects that COVID had are pretty much gone. So I don't predict a crash coming. I do predict some uncomfortable increases in interest and some more distressed sellers coming into the market. Sure, and preparation, I guess those who prepared well enough and put some money away during the time where credit was a bit cheaper will then be able to make those bold moves that can, you know, turn the investment a little better, right? Yeah, sorry to interrupt you, but I also wanted to say the challenge that we have is that you don't really have many alternatives. You know, you can't leave your money in the bank because bank is giving you 6% interest. So inflation is eating into all of your money saved in the bank. If you leave your money in the bank, you basically aren't growing in wealth because inflation eats that. You can't really go into the stock market because it's so volatile. And right now nobody knows if we've hit the bottom or if we're going into recovery mode. Property is a bit inflation proof. You know, your property values tend to appreciate year on year in line with inflation. You can charge rent higher year on year, again, alignment within inflation. So if you're looking for an inflation hedge, actually the property market makes a lot of sense. We don't have many good alternatives, to be honest. Yeah, no, sure. And that is a given. So as we wrap up our conversation tonight, what advice would you have to somebody who is probably already in the space as an investor is looking to beat inflation, is looking to ensure that they are able to stay afloat and even invest a little bit better in this time? What advice do you have for them? Yeah, I think you have to look for high yielding properties. So my focus is on the low income market where you have more than enough rent to cover all your expenses, including your bond and you're left with a little bit of profit at the end. So that's the model that I focus on. That is protective against inflation, it's protective against increases in interest rates because my tenants are paying the bond. So as long as I've run my numbers correctly, that makes sense. Where people get stuck is when they have negative cash flowing properties, where they buy the property and every month they have to fund the shortfall with their salary. That starts to become more and more taxing as your interest rates come up because then you have to use more and more of your salary and eventually you get to a situation where you've got no more affordability to get more lending from the bank. The second bit of advice that I would say is to get educated on the property market or if you've realized that property is not for you and you want to go for stocks, get educated in the stock market, get educated, become financially literate because you can't, I don't believe in giving a financial advisor the responsibility of looking after the most important element of your life. You have to understand the risks and returns of every investment and then make an informed decision. There's so much content online. YouTube is full of great speakers and teachers and sometimes you have to pay for content, sometimes you don't, but go and get educated before you invest because a lot of what I'm talking about now shouldn't be an issue if you had the right knowledge to begin with. Correct. No, thank you so much for that and that's the reason why we have this show every single day, weekdays, Monday to Fridays, bringing experts like you to come share insights like that so that everybody can be educated in terms of these great and big things that some people find scary but are actually quite simple in application. Thank you so much for joining us Lauren and have a good night. Cheers. Thanks to me, cheers. And that's how we wrap up our episode tonight talking inflation and the property market. Thank you so much for joining us and hopefully you learned a thing or two on how you can prepare and ensure that your investments are inflation proof. Have a good night and thank you so much for joining us.