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Before investing in a rental property, there are a number of key factors to take into account, explains Craig Hutchison, CEO of Engel & Völkers Southern Africa. “Location and the future of the location is the first and foremost aspect to consider when purchasing an investment property that will result in capital appreciation. The next features to take stock of are fixtures and fittings. Are they durable and will you have high maintenance costs?”
“Thirdly,” says Hutchison, “establish if there is a demand for a particular property. Do your homework on the area and the types of properties that are in demand. It makes more strategic sense to invest in a two-bedroom unit instead of a three-bedroom house, if the demand for the former is greater.”
Lastly, Hutchison recommends that buyers look at a five-year view to invest as a minimum time frame. Ten years is preferable as this will generate a more valuable return on investment, as this should give the best capital appreciation on a well-located and maintained property.
Below is an outline of how to calculate ROI.
If an individual purchases a property outright with no bond, the profitability or ROI is calculated as follows:
In 12 months’ time, as an example:
To calculate the property’s ROI:
If the property is bonded, the profitability is worked out as follows:
One year later:
To calculate the property's ROI:
As demonstrated in the examples above, the ROI for a rental property is different depending on whether the property is financed via a home loan or paid for in cash. It is also important to bear in mind certain variables such as if the property is vacant and there is no rental income for a number of months or maintenance costs are higher than anticipated.