Ask a property investor – Is a cheap CBD apartment a good investment?
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
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.
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Who is Grant Smee?
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.