Property is the best-known passive income investment, although the word “passive” is a bit of a misnomer. Property has high holding costs and requires tenant management.
According to FNB Property Economist John Loos, current gross property yields are in the region of 9% – which means an investment property of R800 000 could expect rental income of R6 000 per month. The mortgage, after a 10% deposit, would be R7 100 per month. However, you’d still have running costs such as rates and taxes, levies, agent fees, insurance and maintenance, which amount to about R2 000 per month, effectively reducing your net income to R4 000 per month, or a net yield of 6%.
In the first few years, you’d have to supplement the rental shortfall unless you were able to put down a substantial deposit. According to Tenant Profile Networks, rental escalations are only about 5% so it would take approximately12 years before your rental income fully covered the mortgage costs.
The good news, however, is that by doing your homework, you can find good investment property opportunities. Jonathan Kohler, CEO of Lansdowne Investment Properties, says many people make the mistake of buying a two-bedroomed apartment with lower returns, while the real sweet spot is the one-bedroomed or studio flat. “The rental achievable for studios and one-bedroomed apartments range from R5 000-R8 500 per month, depending on location and positioning within the complex.
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