Buying a property and collecting rent every month can sound like an easy way to build wealth and earn passive income.
But if a tenant pays R12 000 a month, the landlord isn’t necessarily taking home anything close to that amount.
Levies, rates, maintenance and other expenses can take a significant bite out of rental income, while vacancies can also affect the overall return.
For South Africans considering buying a rental property, understanding the difference between rental income and actual profit is essential.
R12 000 in rent doesn’t mean R12 000 in your pocket
Garreth Gibson, who manages Johannesburg rentals for Pam Golding Properties, says investors should look beyond the headline rental yield when assessing a buy-to-let property.
Gross rental yield is only a starting point. What ultimately matters is the net yield – what remains after the costs of owning and maintaining the property have been deducted.
Gibson gives the example of a property generating R12 000 a month in rental income.
Operating expenses such as levies, rates, maintenance and other costs can account for around 35% of the rental income.
This could leave the landlord with approximately R8 000 to R8 500 a month, depending on the property’s individual costs.
The costs landlords need to consider
The expenses associated with a rental property can include:
This is why a property with an attractive gross rental yield isn’t automatically a profitable investment.
Don’t forget about maintenance costs for your rental property
Maintenance is another expense that first-time landlords can easily overlook.
Gibson recommends building a maintenance reserve into the calculations, suggesting that landlords set aside around 5% of monthly rental income for future maintenance.
Wear and tear is inevitable, with expenses such as painting, repairs and replacing damaged or worn-out items eventually becoming necessary.
Putting money aside each month can help prevent these costs from becoming a financial shock.
Vacancy is another factor landlords need to consider.
In some prime Johannesburg areas, including Sandton and the Northern Suburbs, vacancy rates are approximately 4.5% to 6%. If spread consistently over a year, that could mean a property is vacant for roughly 18 to 22 days.
Although relatively low vacancy rates indicate healthy demand, even a few weeks without rental income from a tenant can affect an investor’s annual return.
A high rental yield isn’t everything
Gross rental yields of around 16% can potentially be achieved in parts of the Sandton market, depending on the property, purchase price and rental income.
However, Gibson says investors shouldn’t focus on this figure alone.
A property with a slightly lower gross yield but manageable expenses and strong tenant demand could ultimately make more sense than one with high operating costs.
