One bedroom apartments have been the best-performing property investment over 12 years in the residential sectional title space, according to Jonathan Kohler, CEO of Lansdowne Investment Properties.
This is despite the fact that two bedroom apartments continue to be a more necessary purchase among South Africans, albeit with lower returns.
“The thinking behind this is that two people could rent the property together or two people could perhaps purchase the property. However, this has simply not been the case and investors in this market are not reaching their maximum return,” Kohler said.
“Investors looking to purchase a property must keep two of the key principles in mind – rental return and capital appreciation.”
As a result, over the past five years it has become more generally accepted that the studio or bachelor apartment has become the entry-level apartment for tenants and owners alike Kohler, said.
The below is an example of two properties in the same complex in the Northern suburbs of Johannesburg. The first is a one bedroom apartment and the second is a two bedroom apartment both on the ground floor sold in 2016.
Property A: One bedroom ground floor apartment
- Price: 740,000 (transfer duty free)
- Rental: R7,000
- Levy: R977
- Rates: R320
- Net rental return: 9.25%/annum
- Appreciation: 8%/annum
- Total return on investment: 17.25%/annum
Property B: Two bedroom ground floor apartment
- Price: R980,000(transfer duty R6,900)
- Rental: R8,250
- Levy: R1,650
- Rates: R420
- Net rental return: 7.25%/annum
- Appreciation: 8%/annum
- Total return on investment: 15.25%/annum
“Capital appreciation in the above example is estimated at 8%/annum for both properties, but again it is important to remember that at the lower price point of the one bedroom apartment, there are far more first time home owners and first time investor buyers who can afford to purchase the property from you when it is time to sell.”
“The capital appreciation is only realized when the property is sold. Keep your investment properties in the sweet spot and you will increase your chances of the property always being tenanted, and easily sold at a good price,” said Kohler.
“The transfer duty rates are the lowest in this market, where properties purchased for R750,000 and less are transfer duty free and properties purchased between R750,001-R1,250,000 are charged at 3% of the value above R750,000,” Kohler said.
“So even if a purchaser invested in a property for R800,000, the transfer duty would be R1,500.”
The rental return percentage is greatest on a studio or a one bedroom apartment compared to two and three bedroom apartments, which is based on the rental amount.
The rental achievable for studio and one bedroom apartment range from R5,000-R8,500/month – depending on location and positioning within the complex.
This rental price point constitutes the largest amount of quality tenants in South Africa. These are people who can afford to pay between R5,500-R8,500/month in rental.
Affordability for these clients should be calculated the same way banks pre-qualify clients for a home loan, their gross monthly income should be three times or greater than that of the monthly rental amount.
So, to qualify for a monthly rental of R5,000/month, a tenant would need to earn a gross income of R15,000/month. Similarly, to qualify for a rental amount of R8,500/month you would need a gross income of R25,500/month.
“The largest market of quality tenants, first-time home owners & first time investors would then fall in between the R15,000-R25,000 mark.
“It is evident that the one bedroom apartment has a far better rental return percentage than the two bedrooms, in fact a 2% difference which is substantial,” said Kohler. It is also important to remember how much bigger the market is that can afford to pay R7,000/month in comparison to R8,250/month in rental, he added.