Why Rental Properties Outperform Shares

When I first began buying rental houses and commercial buildings, I could easily find properties that offered net un-leveraged rental yields of 14 to 24 percent.

Today it is different story in South Africa. With the huge growth in property prices the last eight years today’s rental properties yield four to eight percent (unless of cause you know where to find bargains such as www.propertyinvestments.co.za and with the Property Pro Investment method)

Many people will tell me that four to eight percent doesn’t seem like a great rate of return. But relative to shares, properties win hands down.

Let me explain why.

Why Rental Properties Outperform Shares

At present, the annual dividend (income) yield on the JSE shares barely reaches 3% percent.

If you follow the advice that says you must diversify across a broad variety of shares, you might achieve a yearly income of R30 000 (3 percent average yield) from a share portfolio valued at R1 million if you are lucky. In contrast, a million in property value would return a rental income (net of expenses) of R80,000 a year.

Lets say you need an income of R80 000 (the level a property can easily give you) per year this means you will have to eat into your share ness egg.

If you want to achieve this income with property – no problem.

So if this is your income level and you want to maintain this standard of income level you will have to eat into your share capital – whiles if you accumulated the R1 million in property you will have no problem. You will never deplete your capital like with shares.

So what’s the verdict?

Share income increases over time on condition the share price keeps on growing.

Rental income also increases because it is indexed against inflation..

So if history is any indicator, it is clear that you will achieve an extremely competitive yield, growth, and protection against inflation with rental property.

How do you calculate the percent yield on a property investment?

You take rent collections, less all cash expenses and mortgage (bond) financing. You calculate this figure by dividing the price of the property into its net income; e.g., R10,000/R100,000 = 10 percent yield.

With the NCA now in effect – is buying investment properties more or less attractive?

The NCA is now in effect.

This seems to be good news for property investors because it turns a sellers market into a buyers market? But conventional wisdom says to do the opposite of what the market dictates.

So does this mean buying is less attractive now?

Brendon

What happens if the property market goes into a recession?

With the new National Credit Act and the last couple of interest rate hikes what will happen to our property investments?

Edward Smit

What must I look for when I am buying a home?

Pierre Visagie

How will the new National Credit Act’s 30% rule effects investment property?

What about the new "National Credit Act" and its effect on banks - it looks to me that the banks are going to be much more strict in supplying bonds to people like us (you and your students) who want to buy more than just the property that they're living in?

What about their rule about not spending more than 30% (I think that's their figure) of household income on bond repayment?

In the past this wasn't strictly applied, but this new act forces the banks to be more strict and rigid!

Jacques Fourie