Rental property advice please

[paedwards]

I would appreciate some input please, on this situation.

Bought a property in 2016 for R1,700 000 in Pretoria East, 3 bedroom free standing house in complex in a boomed suburb. Put down a R600 000 deposit thinking this was it. It wasn't.

A year later moved to Joburg, bought another house (well the bank did for me).

Been renting out the Pretoria house since then. Currently getting R12500 rental per month. After all monthly expenses are paid (bond, levy, r+t, agent fees) I am losing R2990 per month currently, especially with the current interest rate. I can absorb this loss, it's no problem.

Current tenant is vacating, will be aiming to get R14500 less agent fees, so probably around R13500. My current yield on the property, if I have this right, is 5.7%. The current value of the property is R1,850 000 apparently. So the only reason I still have the property is the large deposit which offset the repayments and means the current loss is manageable.

I know property is a long term investment. The property is relatively new, in good condition, in an excellently run complex with a low levy, in a good, boomed suburb. I like the idea of acquiring property in terms of diversification, it will be paid off in 13 years. Technically, at the moment, I am acquiring this asset and it is only costing my R2990 a month perhaps is a way to think about it, though I lost R600k liquidity to be in this situation.

Do I hold fast and continue? Thoughts and inputs would be greatly appreciated, thanks!

 

[zvikisum]

@paedwards You have a long term plan from what you have described. It's in a good estate. Keep at it. Don't panic sell. You'll find another renter in due course

 

[paedwards]

@zvikisum Thanks for the input.

 

[sanny11]

@paedwards Also don't forget the acquisition cost on buying a new property. Transfer duties, registration costs etc

 

[vancouverguy]

@paedwards It is costing you R 2 990 plus the opportunity cost of returns on your equity in the property invested elsewhere plus the future maintenance costs you will incur, plus a risk value assigned to not having a tenant for x months.

What do you mean by 'diversification'? How much equity in a single property vs other investments?

 

[paedwards]

@vancouverguy Thanks, these are important considerations and are difficult to quantify in some respects. I mean diversification as in having other investments in shares, pension, TFSA, etc.

 

[vancouverguy]

@paedwards What is the value of the equity exposure, bonds vs property currently?

What is the ideal diversified distribution?

Most people are horribly overweight with money in one or two residential properties - which is worse diversification than having none.

 

[skyrover]

@paedwards The way you put it in the end is exactly right, you are only paying 3000 a month +600k deposit for an appreciating asset now worth 1.85mil. This value generally continues to exceed inflation if the area is good. It's definitely not one to walk away from. You don't necessarily have to bump your rental too high if you can absorb a bit, as the rental market will also be under strain with the rising prices. You can and should have an annual escalation clause in the contract that protects the rental income from inflation.

 

[paedwards]

@skyrover Thanks for the response. Yes, annual escalation is in the contract.

 

[skyrover]

@paedwards Hundred percent, remember now that although you "lost" 600k in liquidity you have gained this larger asset which can be leveraged for more assets in the future as well. Considering the downpayment I would imagine you could already start using it if you wanted to

 

[prettythings]

@paedwards Well, the question is a philosophy one. Do you want to be in property rentals or not? Usually the properties that are good ROI rental properties are not in the higher brackets(750-1 mil).
As for capital growth, who knows.
So my 2 cents, sell for a good price. You dont need to negotiate. And then if you still want to invest in property either buy a smaller place, or move the capital over to your current place of residence.

 

[paedwards]

@prettythings Thanks for the response. Yes, I ended up a landlord without intending to be one. It's okay, I could probably do without being one to be honest, but the rental agents do the legwork and they are really good, so that is some relief.

 

[ifollowyourvoice]

@paedwards I think your rent is too low.

Look at Private Property website under rentals for your area and compare.

 

[klouise84]

@ifollowyourvoice No it’s not, it’s the current rental rates. I am renting a R2.1 Million House for R13k per month in Durbanville

 

[cdb50]

@klouise84 wow.

I'm buying low value/priced lofts and renting them , have done one earlier in the year and am currently setting up for the next one.

R4600 rental income on a 400k property with levies and rates only 1k. So i mean i want to buy another one in the 400 to 500k price range but i also want a nicer small townhouse but the ROI isnt as good as on the lower end of the market.

 

[klouise84]

@cdb50 Low end market is a good market to be in but you have a much higher risk tenants defaulting and then not leaving

 

[igorgoro]

@klouise84 Sadly, this trend is increasing in the middle income market as well. Have heard of 6 separate cases in the last 12 months.

An acquaintance is currently sitting with a squatter (non-paying tenant) and waiting for the legal system to do it's thing, and 2 others are dealing with rent in arrears and catch-up arrangements.

Im fortunate to have good tenants but even they have said that they can feel the pinch and may need to downscale in the next year. It's personally indicative of tough economic conditions as their rent has not increased since Jan 2020 and they've had no significant lifestyle changes.

 

[paedwards]

@ifollowyourvoice Yes, it is too low, but I won't get more. I have checked myself and the managing agent has also checked, R15000 would be the best we could hope for.

 

[prarierose91]

@paedwards Bad time to sell cause interest rates are the highest they have been since 2009. I would wait until November next year. Rates seem to be on the way down, and the election will be over. Hopefully, the selling price will be better then.

 

[pinksakinah]

@paedwards I too am in the same boat, with a few differences, R400 000 deposit but also laying out R2700 every month above expenses, the house value is R1 050 000.00 and I'm recieving R8000.00 rent. the only reason I am holding on is as there is a planned route for the GauTrain no further than 500M away from The complex...which is supposed to be coming up in the next 5 years. (Eagle canyon area/Honeydew) so if that does appear than I believe I can be asking for a lot more, perhaps even air bnb the place to business men/woman/they/them humans/furries (whatever people identify themselves as nowadays.)

But my hopes and dreams are based on those in power.

I have recently tested the waters by putting it on the market as our old tenant moved out last month, I havnt had one bite for a sale but about 10 enquiries for rentals, which we accepted a new tenant to not hemmeroge more than I need to.

I dont think banks are as lienant on bonds anymore so I think you can be a bit more aggressive on your rental as people still need some where to stay.