Yoh, 52 Flats Unseen? How to Analyse a Rental Property
Agents walk you straight to the kitchen. That's where the emotion lives.
I don't go and look at a property first. I go to the numbers. On the biggest deal I'm part of, I only went to see the building about three years after it was finished. By then it was bricks and mortar to me. I'm a shareholder.
So here's my rule: before you look at the kitchen, check three numbers. The price per door against similar sales, the real rent the property earns today, and the worst month, when it's empty and something breaks. Then work out net yield, not gross: rent minus rates, levies, insurance, maintenance, vacancy and management. Many "great yields" disappear once the bond is added. If one number fails, don't go inside.
Number 1: What is the price per door?
What you're paying for each rentable unit, compared with what similar units nearby have actually sold for, not what they're listed for.
Ask your agent for recent comparable sales, or check the portals' sold data. A Lightstone report on the property helps too. If you're paying well above comparables, you're starting behind.
That was my first mistake in Amsterdam in 2003: I paid too close to the asking price at the wrong point in the cycle. It cost me over €14,000.
Number 2: What is the real rent?
What the property rents for today, with proof: a current lease, bank statements, or comparable rentals in the same building or street.
Never trust the seller's "it could rent for…" figure. Potential rent is a sales tool. Actual rent is a fact.
Number 3: Can you survive the worst month?
Picture the property empty, and the geyser bursting in the same month. Can you pay the bond, rates, levy and repair without touching your salary or a credit card?
If one bad month breaks you, it isn't an investment. It's a gamble.
I'd add one more test, the one I use on every deal: how far can the rent drop, or the costs climb, before the property makes nothing? If it can take a 25 to 30% knock and still not lose money, I'm happy. If a 5% knock sinks it, walk away.
Number 4 is whose name it goes in. The Directors Fortress shows you how I answer it before I sign. R99 once off. Start here
What's the difference between gross and net yield?
Gross yield = annual rent ÷ purchase price. It's the number on the advert. It's true, and it's almost never the money you keep.
Net yield = (annual rent − running costs) ÷ purchase price. That's closer to what the property actually earns before finance.
Whenever I share a net figure, somebody replies "pathetic return". No bru, that's net. After every single bill. Google it. AI it. Learn the difference before you compare deals.
Worked example
Illustrative numbers only. Costs vary by property, area and municipality.
A sectional title flat at R1,200,000, renting at R11,000 a month (R132,000 a year).
Gross yield: R132,000 ÷ R1,200,000 = 11.0%. Looks lekker on the advert.
Now the running costs for a year:
Rates (R900 a month): R10,800
Levy (R1,800 a month): R21,600
Insurance (R300 a month): R3,600
Maintenance (about 1% of value): R12,000
One month vacant: R11,000
Agent (8% of rent plus VAT): R12,144
Total: R71,144
Net before finance: R132,000 − R71,144 = R60,856, so a net yield of about 5.1%.
Now add the bond. With a 90% bond (R1,080,000) at an illustrative 11% over 20 years, repayments are roughly R11,150 a month. Even with a tenant in place every month, this flat costs you roughly R5,000 a month out of pocket.
Verdict: it fails number 3. An 11% advert, a negative property. Yoh. This is exactly why you run the numbers before you visit.
What I'd watch for
Every cost estimate is an estimate. Get the actual levy statements, rates account and insurance quote. And check the body corporate's books properly. In my experience their accounting is often a mess, and you don't want to find that out during a sale.
Growth isn't cash flow. A negative property might still grow in value. That's a bet, not a plan. Make it a decision, not a discovery.
Rates move. Test your numbers at a higher interest rate.
Where the company fits
When all three numbers pass, ask the fourth question: whose name does it go in? Answer it before you sign. A property inside its own company, with its own bank account, also makes the numbers easy to track: one entity, one account, and the answer is on one page.
The full deal-analysis toolkit, running the numbers like a pro and cash flow versus flip, is in The Vault.
FAQ
What is a good rental yield in South Africa?
It depends on the area, property type and risk. Focus on net yield after all costs, and whether the property covers its bond.
How do I calculate net rental yield?
Annual rent minus annual running costs (rates, levies, insurance, maintenance, vacancy, management), divided by the purchase price.
Should I buy a property that doesn't cover its bond?
Only as a deliberate decision, knowing you'll top it up each month and why. Most investors starting out want properties that carry themselves.
What's the first thing to check when viewing a rental?
The numbers, before the kitchen: price per door, real rent and the worst month.
Get number 4 right too
The Directors Fortress shows you how to set up the company and buy in it. R99 once off.
Education only. This article is general information, not tax, legal or financial advice. Speak to a registered tax practitioner, attorney or financial adviser about your own situation.
About the author
Michael Bowen co-founded ZAHomes. He bought his first property in 2003 on the outskirts of Amsterdam, with a 100% mortgage, at the wrong point in the cycle, and lost over €14,000 on it while sanding the floors himself in a heatwave. Twenty-odd years, 40-odd countries and a lot of property school fees later, he lives in Cape Town and teaches South Africans to buy and hold property inside a company. His view hasn't changed: an investor's greatest assets are the lessons from their failed deals.
