Returns on up-market residential property

We have been looking at rentals for penthouses and have found that the returns on high end residential property are terrible.

The first thing we noticed was that a penthouse that was for sale for R15m was available, fully furnished, for rent at R55 000 pm. That's a gross return of only 4.4% before levies etc. It had originally been on the market for R22m!

Then there was another one for sale at R12m and available for rental at R45 000 pr month, beautifully furnished. Gross return 4.5%.

Now, it is possible that the owners bought at a significantly lower price and are trying to make a killing, but if you wanted to make a decent gross return of say, 12%, you'd have to be very careful what you bought. You'd have to buy the first one for R5,5m and the second for R4,5m.

Add to that the fact that these penthouses have remained untenanted for the last two months, although the first one was rented for one of those months through Air BnB, a very on/off source of income. In fact, with the rate at which residential apartments are being built in Sandton, it is not surprising that landlords are falling over themselves to find tenants.

Back to my fundamental principles. It is far better to buy a lot of lower priced units than a few higher priced ones. Sure, there's more admin, but you can pay an agent to look after that, and the odd vacancy doesn't hit you anything like as hard. The typical return is around 12% or more gross, and significantly higher than that if you buy well.

Don't buy with your heart, buy with your head.


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