Here's a 2 bedroomed apartment in Stellenbosch on sale for R850 000 with a current gross rental of R4 000/month. Let's have a look at part of the ad:Located in the Stellenbosch Golden triagle with 5 year growth of 23%-28%. The monthly rental income of R4000 will cover 40% of your bond repayment or be a usefull passive income for the cash buyer.
First off, if you get 23-28% of growth in the next five years you'll be extremely lucky, considering prices are trending downwards and only sub R500 000 properties in impoverished areas like the Cape Flats are seeing any growth. Secondly R4000 won't cover 40% of your bond because the advertiser hasn't yet taken off ownership costs like levies, rates, maintenance (and a student flat in Stellenbosch will require more maintenance than usual) and vacancy. And thirdly if you're a cash buyer you're much better off leaving your money in a fixed deposit where the 12-%13% interest you'll receive is more than double the 5.65% yield on this place. Here's the income and yield graph:
So as we mentioned before paying in cash gets you 5.65% yield, about 6% below inflation. A 65% downpayment is required to be cash flow positive and with a 50% deposit you still need 2.48% capital appreciation to not lose any money. And as we mentioned before, the returns are less once ownership costs are taken into account.
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