I live in South Africa, and I am aiming to live a frugal, early retirement life. I'm considering investing in a rental property (and I am in the process of selling a previous investment property).
The situation in SA is very different to the US - for one, interest rates are much higher (9% is the current prime rate, an all time low. My current mortgage is at 8.25%, I'll probably only get 8.6 or 8.7% on my next mortgage). However, inflation is also a lot higher, so that obviously impacts the interest rate.
Renters generally have much lower standards and requirements in the US - it's not at all the norm for a property to be newly painted, have new carpets, etc when being rented. Added to this, the nature of our buildings mean that maintenance (especially on rental apartments) is much lower than in the US. We don't have central HVAC, and tenants bring their own appliances. In most apartments, the only two electrical appliances are the oven/stove and the geyser (water heater).
Obviously all the above mean that the normal rules (half the rent for maintenance, etc) that you apply for a US property can't be applied to an SA property. To give you some figures, I'm considering buying the following:
Bachelor flat, selling price R330 000. Owner will take an offer of R315 000, so my total cost of buying would be about R325 000. The flat currently attracts a R3500 rental income a month, and is in a great rental area - walking distance to the two of the biggest Universities in the country, walking distance to the head office of the national broadcaster, many other employers close by. I've seen other units in the complex go for R3800, and rental inflation is about 8% a year, so I would expect to get a higher rent when the current tenant moves out. Costs would be R600 Levy (essentially HOA / condo fees for the building) and R150 rates and taxes. Electricity would be paid by the tenant (pre-paid), water is included in the levy.
So the maths works out as follows:
R3500 (rental)
- R2631.69 (20 year 90% mortgage at 9%)
- R750 (levy and rates)
= R118
(These are pessimistic guesses - hopefully I would get 8.5%, and a higher rental once the current tenant is up for renewal in 3 months time. I also might be able to get a 100% mortgage from day one, which would mean I would be putting in money every month, but would have nothing down).
So it's cash flow neutral, rather than positive. Based on my maintenance experience with my previous unit, and what I've heard from other landlords, I am looking at about R1000 to R1500 a month in expenses. I would manage the unit myself, which would obviously be "unpaid work" but would not result in high costs. For my previous unit, I've never had it empty, and I've had to visit it less than once a year - this may just be luck thus far! So let be pessimistic and say I would lose R5k in the first year, and that I make that back in year two and three.
Obviously, as a US investment I'd look at this and say "not a chance". However, when it comes to the property options in SA, it's one of the best I've found. There are positive cash flow properties, but they are generally in significantly worse areas. And once I take into account the need to hire a company to manage the unit (I would not take the safety risk of doing it myself), their returns are not that much better than this unit.
I feel like this will be a good investment in the medium term - with very little down now (R32 500) I'll own a property in a decent part of the city that taking into account rental inflation, will cover the losses from the first year by the end of the third year. By that point I'll be able to refinance and take out my initial investment, and leave the property to slowly pay itself off and appreciate, and could then refinance to unlock value as it appreciates.
Am I fooling myself to think this is a good idea?