Real Estate Investor Magazine South Africa April 2014 | Page 31

RESIDENTIAL
area, such as new access roads, growth in industries
around the area that might create job opportunities,
thereby adding to the demand for properties in the
area, and then establish what the rental returns would
be if you had to rent out the property.

Right price is key
It is very important to acquire the right property
at the r ight pr ice in the r ight address. F i rst
consider the type of property that involves lower
maintenance, such as a cluster home or a sectional
title development.
The right price is very important as every cent spent
over the market price will need to be recovered over
time and this can eat into a potentially rewarding
investment. Avoid an emotional purchase and
look at the facts and return. Remember, although
a property may look discounted and may offer a
good deal if it is in the wrong location it may never
be as rewarding financially and it may also be more
difficult to find a tenant. Also consider good security
and good access to public transport and highways.
If you are looking to build up a property portfolio,
start small and avoid having too much debt. If you
‘own’ several properties but they are all heavily bonded
and interest rates commence on an upward trend, you
may over time be compelled to offload. Never rush to
acquire property, consider your own financial position
and future growth and once you have established
yourself with a few rental opportunities and they are
more secure then look for others. Plan for the worstcase scenario and have a contingency plan available.
Also remember that your rental income is taxable and it
is wiser to have a high bond on a rental property as the
bond interest can be written off against income. Any
excess liquidity can be moved to other investments or
the bond on the home in which you live. Be prepared
to make the right decisions and you will then reap the
rewards over time.
Budget is a high level determining factor as to which
areas, suburbs and property type you invest in. It’s also
important to consider spreading your risk, for example if
you have R5 million to invest in property, do you put
it into one, two or maybe three properties in three
different areas? He also emphasises the importance of
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buying at the right price, besides timing, location and
all the other relevant factors. “If you pay too much when
you enter the market you ‘pay’ more later, when you sell.

What rental return can you expect?
In the Cape Town metropolitan areas rental return
generally is around 5% to 8% gross of the property’s value.
For example, a R1.9 million purchase could provide
an approximate R132 000 gross annual rental return
(R11 000 per month), and so the return does not
generally vary hugely on a particular purchase price –
although, there are of course exceptions to the rule.
The return does, however, reduce on the more
expensive or exclusive properties ie it could be below
five percent, but the capital gain on these properties
is usually inverse. The rental escalation will probably
be around 6%-8% so over time, depending on
current market conditions, as the rental increases and
ultimately one aims for a reasonable capital gain on the
sale of the property. As a simple example, if you pay
R1.9 million for a property and sell it a few years later for
R2.28 million, seemingly you have made a 20% profit.
However, all costs associated with such a purchase since
its acquisition up to the date of sale need to be taken
into account.
And if the property was acquired specifically as a buyto-let investment, then the rental income needs to be
offset against all expenses, reflecting the actual return
one makes.
Given the current acute shortage of rental properties
available which is widespread in Cape Town areas
such as Southern Suburbs, the City Bowl, the Atlantic
Seaboard, Southern Peninsu