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Property mini-series part 3: Goal of the investment

June 16, 2024
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FinMeUp
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FinMeUp

In this mini-series, we discuss the ins and outs of real estate investment.

 

When looking to buy property, its important to identify the goal of ones investment. There are two possible options:  Buy-to-sell for capital appreciation and buy-to-let for passive income. The trade-off is simple: capital growth or high rental yield.

Capital growth is simply the increase in value of an asset over time. Capital growth can occur due to many factors, such as economic cycles, improvements to the property and/or general area and influx of demand.

Rental yield can be calculated on a gross or net basis. Gross yield is the yearly rental income (or monthly income x 12) divided by the value of the property. E.g., if the monthly income on an R800 000 property is R6 500 (or R78 000 yearly), the gross yield is R78 000 / R800 000 = 9.75%. 

Net yield is the rental income, after deductions, divided by the value of the property. E.g., if the monthly rates and taxes on the property in the abovementioned example is R800, it means the net monthly income amounts to R5 700 (as opposed to R6 500). The net yield on the property then amounts to R68 400 / R800 000 = 8.55%. 

If ones goal is to flip the property, one normally prioritises areas with high capital growth (which normally coincides with relatively low rental yields). Popular high-growth areas include Stellenbosch, Durbanville, and Cape Town. These properties often generate roughly 4%-6% yield, but the year-on-year increase in value is high. 

Alternatively, if ones goal is to generate passive income over the long-term, areas such as Bellville and Sandton typically offer high yields of around 8%-12%, but the year-on-year capital appreciation of these properties is relatively low. 

Either way, buying at the right price is crucial to the success of the investment. As Rich Dad Poor Dad author Robert Kiyosaki famously said: You make profit when you BUY, not when you sell. Buy the right property and buy it as cheaply as possible. Always make sure that both boxes are ticked before investing.

 

 


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