Yoh, The Six! Sectional Title Levies and Rental Yield
A sectional title levy is a monthly cost you don't control, and it can take a large share of your rent. Before you buy a unit, ask for twelve months of levy statements, the body corporate's reserve fund position and the latest AGM minutes. Then work out your yield after the levy, not before it.
You compared the rent to the bond. The rent was higher. You thought you were positive.
Then you added the levy.
What is a sectional title levy?
In a sectional title scheme you own your unit, and you share ownership of everything else. The roof, the lifts, the driveways, the garden, the security.
The body corporate runs those shared parts, and every owner pays a monthly levy to fund them. It usually covers building insurance, security, cleaning, common-area maintenance and management.
By law the body corporate must also keep a reserve fund for big future repairs and a maintenance plan covering the years ahead.
How do levies affect rental yield?
Directly. The levy comes off the top, every month, whether your unit is let or empty.
Here's an illustrative example. These are assumptions, not facts about any property.
- Monthly rent: R8,000
- Levy: R2,000
- Rates: R600
Before you've paid the bond, insurance on contents, the agent or a single repair, R2,600 of the R8,000 is gone. That's about a third of the rent. In this example the levy alone is a quarter.
Now look at how the unit was advertised. The yield on the advert is almost always gross. Annual rent divided by price. The levy isn't in it.
That's how a "positive" property becomes one you top up every month.
Get the structure right first. The Directors Fortress is the step-by-step for buying property in a company name. R99 once off. Start here → zahomes.co.za/start-here
Which three documents should you ask for?
Before you sign, ask the seller or the managing agent for these.
1. The last twelve months of levy statements. You want the real levy, any increases, and whether the seller is in arrears.
2. The reserve fund position. How much is in it, against what the maintenance plan says the building needs. A thin reserve in an old building is a special levy waiting to happen.
3. The minutes of the last AGM. This is where the truth lives. Planned projects. Disputes. Owners in arrears. Talk of a special levy.
If the agent can't or won't get them, that tells you something too.
What is a special levy?
A one-off charge raised when the scheme needs money it doesn't have. The roof fails. The lifts need replacing. The building needs waterproofing.
Every owner gets a bill, in proportion to their share. It can run to tens of thousands of rand per unit, and it's due whether your tenant has paid or not.
The reserve fund exists to avoid this. A healthy reserve is the best sign you'll get that a special levy isn't around the corner.
What does a healthy scheme look like?
- Levy increases that are steady, not sudden
- A funded reserve and a real maintenance plan
- Few owners in arrears
- Recent AGM minutes that show decisions being made
- Buildings and common areas that look maintained when you walk around
A well-run scheme is boring. Boring is what you want.
Are levies a reason to avoid sectional title?
No. A levy pays for things you'd otherwise pay for yourself in a freestanding house. Insurance. Security. Exterior maintenance. In a good scheme it's fair value.
The problem isn't the levy. It's not knowing the levy, and not knowing what's coming. For the wider trade-offs, read townhouse investment: pros, cons and levies.
The catches
- Levies go up every year, and you don't set them.
- Rules can limit you. Conduct rules may restrict short-term letting, pets or alterations.
- Arrears follow the unit to transfer. A levy clearance is needed before a unit can transfer.
- Other owners' behaviour affects you. A scheme full of non-payers is underfunded.
- Illustrative numbers aren't your numbers. Run the real ones.
Where the company fits
A levy is the same whoever owns the unit. What changes with a company is where the surprise lands.
A special levy on a unit in your own name comes out of your pocket. Inside a company with its own account and its own reserve, it's a business cost the business planned for. Running the numbers properly is a full section in The Vault. Start with the container first.
FAQ
What do sectional title levies cover in South Africa?
Usually building insurance, security, common-area maintenance, cleaning, management fees and contributions to the reserve fund.
Who pays the levy, the landlord or the tenant?
The owner. The landlord is responsible to the body corporate, whatever the lease says about recovery.
Can levies increase every year?
Yes. The budget and levies are approved at the annual general meeting.
What happens if a sectional title owner doesn't pay levies?
The body corporate can pursue the debt, and the unit can't be transferred without a levy clearance.
How do I calculate rental yield after levies?
Take annual rent, subtract annual levies, rates and other costs, then divide by the purchase price. See gross vs net rental yield.
Related reading
- Townhouse Investment in South Africa: Pros and Cons
- Gross vs Net Rental Yield: The Advertised Number
- 3 numbers to check before you buy a rental
Get the foundation right
The Directors Fortress gives you the investor-friendly offer to purchase, the blueprint for registering the entity, and a walkthrough of the structure I use. R99 once off, yours to keep.
Get started → zahomes.co.za/start-here
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.
Sources
- Sectional Titles Schemes Management Act 8 of 2011
- Community Schemes Ombud Service: csos.org.za
About the author
Michael Bowen is the co-founder of ZAHomes. He has invested in property for over 20 years, in South Africa and abroad, and teaches investors how to buy and hold property inside a company. His philosophy: an investor's greatest assets are the lessons from their failed deals.
