There’s something insane about buying a R1.6m property that you can rent for less than R6000pm

I was recently approached by a client about whether or not I thought he should sell his rental property. Let’s take a look at the facts:

Bought in 2001: R210k (a further ±R70k spent on renovations).

Current value: ±R1.58m (he hopes)

Current rental: R6000 pm (it’s a 27 m2 1 roomed apartment in Stellenbosch)

Levies + rates: ±R1300pm

Net rental: R4700pm which equates to a yield of under 4% (3.6% before any tax has been paid on the rental).

Clearly, it’s not a great investment from a yield point of view.

If he sold the property he would net around R1.47m (after CGT and agent’s comm). If he invested the proceeds, he could realistically draw a 5% (tax-free) income on this for at least 30 years (he is 78). On top of that he would then no longer have to deal with tenants (students) and would also no longer be considered a provisional tax payer by SARS.

I can hear all the rental fans claiming that it’s not about the rental, it’s about the growth, stupid! Let’s consider that as well:

The compounded return over the 17-year period (before CGT etc) is just over 10% pa which is significantly lower than a good equity unit trust fund over the same time, so if it’s growth you are after then this was not a great investment (even the ALSI returned more than 14%pa over that time).

Perhaps the thing that makes the least sense to me is why anyone would buy this property at this stage?

To buy the property with a 100% bond is going to cost at least R15300pm (10% interest rate) and on top of that you will still be paying the levy and rates (R1300pm) so your total monthly cost would be just under R17000! And you could rent it out for R6000 pm! This is insanity!

We have got to get over our obsession with owning property, it makes far more sense (in many instances) to rent…let someone else worry about the bond, maintenance and tax and rather invest the money you would save into some real long-term wealth creating assets.

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