Upmarket properties – What are the returns?

With the economy under pressure and a buyers housing market, it’s a great time for investors to expand their property portfolio. The lower prices in desirable areas may tempt you to invest in more upmarket properties with the aim of adding a jewel to your collection, but what real returns can you expect and what are the risks?

Expensive Properties Are Still Expensive

While there may be a few bargains around, the reality is that the luxury housing market is still very expensive to invest in. Just the other day, an apartment in Higgovale in Cape Town sold for R22.5 million – and it’s not even the most expensive in the city. While it’s true that that property is at the extreme end of the scale, it does demonstrate that there are still high barriers to entry in the luxury housing market.

If you are buying to rent, this opens up other challenges that need careful research and consideration to ensure that the return is worth the financial pressure of a large bond as well as the demands of maintaining a luxury property to the highest standards. For example, an R8 million property with a 90% bond (so, having put down a R800 000 deposit) leads to payments in excess of R70,000 per month.

Rentals at this level are simply not keeping pace at this level to offer high enough returns, with properties valued around R12 million fetching rentals of R45-55,000 per month. Even through short-term rentals like Airbnb which can be incredibly profitable through tourist season, the on/off nature of that source of income is very unlikely to clear enough money through the year.

So, Where Are the Best Returns? 

When it comes to property investing, it’s all about maximising your returns and minimising risk – and that means looking at where the strongest demand lies. While there’s demand for luxury homes, it’s very low when you compare it to the demand for entry-level properties. Not only are people actively looking for them to rent, they are easier to afford, allowing you to buy multiple properties to ensure several streams of rental income. If one property isn’t rented for a month, you can more easily cover your other expenses – something that is not always an option when a luxury home with a large bond fails to attract tenants. It’s also easier to buy these entry level properties directly from developers, saving you additional money by being exempt from transfer fees.

While a lot of research and careful planning still needs to go into your strategy before you purchase these properties, it’s clear that this is often where the healthiest risk/returns balance lies for buy-to-rent investors.

Jason Scholtz is the CEO at Envision Investments and a leader in the property and strategic investments industry in South Africa. For more investor tips and an insider’s look into the South African market, be sure to get in touch, keep an eye on this blog or visit http://www.envisioninvestments.co.za/