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Is rental property still a good investment?

There are several high-level considerations when deciding whether or not a rental property is a good investment.

I recently took a bond for rental property. The property is in good condition and one of the lower-priced rentals in the town. I am worried about the possibility of not having a tenant due to the state of the economy. Is rental property still a good investment?

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Investing in residential property as a long-term investment has been very popular in South Africa over the last couple of years. The difficult economic times in the recent past have, however, highlighted some of the risks associated with such an investment.

The popularity of using rental property as an investment has been largely due to the prospect of capital growth as well as the rental income that an investment in residential property can deliver to an investor. To determine whether or not an investment in rental property is still a good investment will largely depend on your personal circumstances.

When evaluating whether a rental property is a good investment for you personally, you need to look at what investment risk you are taking on, your capacity to take on this investment risk, as well as your income requirement from this investment.

Starting with the investment risk, it is important to understand whether you will be investing in one property or if you will have a portfolio of several rental properties.

Investing in one property raises the investment risk considerably, as your full investment will be exposed to one property in one street, suburb, city and province in South Africa.

This exposes your full investment to a defaulting tenant, troublesome neighbours, a struggling municipality, and the list goes on. Should you have various properties that you want to invest in, you can diversify your investment risk across a number of properties, which will result in much-reduced investment risk.

Your capacity to take on the investment risk is also an important aspect to consider. If your investment in rental property is a major part of your investment portfolio, it again may point to the investment not being appropriate for you, due to the high risk that an investment in a single rental property can pose. On the other hand, if the investment is only a small part of your investment portfolio, you have other financial support like a business, reliable employment, family wealth or you are a dual-earning household, it may be easier to take on the investment risk as you are already well-diversified through your other investments and financial support structure.

Lastly, you also need to understand what your future income needs will be and if the rental income that the property is expected to generate will be sufficient for your needs. One aspect of rental income is that it remains fairly stable and only typically increases on an annual basis in line with inflation. If your income needs fluctuate and you do not have any other sources of income or capital that you can use to fill the gap, investing in a rental property may not be appropriate for you.

These are only some of the high-level considerations to take into account when deciding whether or not a rental property is a good investment. There are many other aspects to consider, such as what the fair value of the property is, tax considerations, the condition that the property is in, and various other factors specific to the individual property before making a decision.

Consulting a financial planner is always important to [evaluate] if and how the investment will fit into your overall financial plan.

  

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