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Ask a property investor – Is a cheap CBD apartment a good investment?

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Q

Hi there, I have saved up R100,000 with the original intention of putting it down as a deposit on a home. But the other day I was searching the property portals and found some Joburg CBD apartments selling for R80,000. I was wondering if I paid cash on one and rented it out for a few years at about R3,000 per month (R36,000 per year), I would make back my R80,000 investment in two years. What are some of the risks vs rewards involved in investing in cheap apartments catering to low-income earners? – Kelebogile

A

Hi Kelebogile, from a simplistic analysis, R36,000 per year on an R80,000 investment provides a fantastic yield. You would, however, need to consider the additional purchase costs, which include transfer fees, when determining the upfront investment required for ownership. Similarly, although the yield at 100% occupancy and full rental payments makes the investment extremely attractive, you need to factor in a few further running costs to fully determine the return to be made on the upfront investment. Some of the costs to take into account would be ongoing maintenance, council rates and taxes, levies (if applicable to the building), property management fees and, most importantly, the risk associated to non-payment of rental.

According to the latest Rental Monitor Report from TPN, the rental band below R3,000 per month has the highest level of non-payment at 9.53%, as well as partial payment and paid-late levels of 10.73% and 11.68%, respectively. The main driver behind these default levels is affordability. This, therefore, presents another potential issue in terms of future rental escalations, as it would be difficult to apply increases in a rental bracket where non-payment and affordability are an issue.

A significant benefit is that the target market for affordable housing is extremely high, with a vacancy rate of only 4.75%.

As an investor going into this market, I would recommend utilising a specialist management company that focuses on the area and property type being invested in, as this should go a long way in reducing the risk of non-payment and vacant periods.


Got a question about property investing? Email david@hometimes.co.za


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Who is Grant Smee?

Grant Smee, MD and franchisor at Only Realty

Grant Smee, MD and franchisor at Only Realty

Grant Smee, MD and franchisor at Only Realty, has been operating as a property investor since 2005. He has a solid financial foundation gained through tertiary studies in finance and accounting, and experience gained in large international financial institutions. Extensive property investment and rental knowledge has been gained through personal property investments and property business ventures since 2005 in both South Africa and the UK. Smee’s specialties include property investment and rentals in the residential housing market.


Disclaimer: The information above is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by HomeTimes and Only Realty. Any expression of opinion is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.

david.steynberg@gmail.com

David A Steynberg, managing editor and director of HomeTimes, has more than 10 years of experience as both a journalist and editor, having headed up Business Day’s HomeFront supplement, SAPOA’s range of four printed titles, digimags Asset in Africa and the South African Planning Institute’s official title, Planning Africa, as well as B2B titles, Building Africa and Water, Sewage & Effluent magazines. He began his career at Farmer’s Weekly magazine before moving on to People Magazine where he was awarded two Excellence Awards for Best Real Life feature as well as Writer of the Year runner-up. He is also a past fellow of the International Women’s Media Foundation.

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2 COMMENTS
  • Denis 3rd January 2017

    Hi Kelebogile.

    I am intrigued at your question and the answer tendered. I would have liked to interview you.

    Don’t be naïve the Fixed Property Rental Industry is not for the feint hearted. There are many laws and regulation, practices and procedures, legal professionals and estate agents that can place you in peril. (Recent entries on this forum point to the “so called” real estate professionals who have got it wrong)

    My first query is how did you get to the R 3,000 monthly rental. An R80,000 bond repayment at 12.5% over 20 Years amounts to less than R 910 per month. Why would someone rent from you if they can buy the property for one third your ask rental.

    As an indication residential property yields 0.75% to 1.25% of the market value of the property on a monthly basis. In other words your R 80,000 investment should yield between R 600 and R 1000 per month.

    I think you are expecting too much.

    Be careful you are not trapped in a “danger discount” property. Again, in other words, a property that is sold at a discount to balance the “poor” nature of the property.

    Risk does not include your levy or rates and taxes or repairs and maintenance. They are merely chores and or expenses that need to be done or paid.

    Your risks are limited largely to your tenants and their conduct. Building “hi-jacking” and tenants stripping your plumbing and electrical installation and or using your property for criminal activities constitutes a risk.

  • Martin 17th January 2017

    Properties are available at R300,000 in JHB CBD where they put 5-8 individuals in at R1000 a month. Not for me though.

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