On Desirability Metrics
Desirability to Tenants – this parameter provides an indication of most tenant’s response to the property – aside from the price. A high score indicates that the unit and its larger context is highly appealing, and indicates to the investor that the risk of vacancies is low and likelihood higher of obtaining premium rent in better economic times.
Net Yield – with the net yield calculated as indicated at the bottom of this section, the score indicates the following:
- 5 – above 8.0% (extraordinary)
- 4.5 – 7.7-8.0% (exceptional)
- 4 – 7.4-7.69% (highly attractive)
- 3.5 – 7.1-7.39% (attractive)
- 3 – 6.8-7.09% (fairly average)
- 2.5 – 6.5-6.79% (typical of new developments)
- 2 – 6.2-6.49%
- 1 – below 6.2% (e.g. retirement homes)
The net yield provides a very useful comparative parameter to evaluate different property investments against one another. A higher yield means not only that the property will reach cashflow break-even much quicker, but also that it will be more profitable over time. You should not try to optimize this aspect above all else – the highest yield properties are the ones with the most risk and/or effort, e.g. flats in Hillbrow, Windsor or Sunnyside or a commune, and you might well after a couple of years realise that the effort is not worth the additional yield. You need to balance net yield with other aspects like expectations of capital growth, desirability to tenants and maintenance expectations.
Location – a full score of 5/5 on location indicates a property located within 3km of the N1 highway or other main centres, in a secured neighbourhood or with its own 24hr security, no extraordinary traffic issues and no other significant concerns (e.g. located adjacent to the main complex motor gate or overlooking the clubhouse). Lesser scores indicate increasing compromise/s on these aspects. The higher the location score, the better your chances of still having a quality tenant paying a fair price in difficult economic times, while during good times you will be able to attract a premium rental price that will improve your yield.
Security – a full score of 5/5 indicates that the property is located in a boomed-off neighbourhood or has its own 24hr security guard, and has no other associated security risk factors. Lower scores indicate a gradual decline in the perceived security of the residents at this property.
Parking – the score here is relative to the type of property. For example, a full score of 5/5 for a 2-bedroom stack simplex indicates a garage very close-by, while 4/5 indicates a carport very close-by or a garage a small distance away, and a 2/5 would indicate a single carport some distance from the front door and inadequate guest parking. As another example, for a stand-alone 3-bedroom simplex, a 5 would indicate a double garage right by the unit with direct access into the house.
Flow & finishes – a high score indicates a highly sensible design of the unit itself combined with high quality finishes, while a low score would speak of a compromised layout and dated or neglected finishes. A low scare would put off many prospective tenants from renting the unit and force you to reduce the rent to compensate.
Complex – aspects we considered here are the architectural appeal of the complex as a whole, the condition and appearance of buildings and gardens, the flow of traffic and spacing of buildings, visitors parking, competence of the body corporate and managing agent and the financial well-being of the body corporate. A high score indicates all is well and that prospective and actual tenants will find the complex to be pleasant, while a low score might indicate a systemic issue that an owner will struggle to rectify.
Traffic – a high score speaks of easy and quick access to the highway or well-flowing thoroughfare, while a low score signifies almost daily traffic frustrations getting to and from the unit. In general tenants prefer lower traffic hassles and many would be prepared to pay a premium on their rent for this privilege when this score is high, or expect a lower rent when this score is low.
On Financial Vitals
Levies/sqm – many complexes currently operate in the R25-R35/sqm range. A lower levies/sqm is typically achievable for complexes with excellent financial management and low overheads. This can be influenced by maintenance requirements, on-site security and other personnel, and communal facilities that require upkeep. A lower figure here is often a prerequisite for higher yields, but might also indicate lower financial risk to the owners. A too low value might also indicate that maintenance issues might have been ignored over a long period, and it will be wise to ask questions in this regard before committing to a property.
Levies as % of rent – levies nowadays comprise an owner’s most significant expense. This metric will hopefully assist investors to place the levy burden in a context that enables them to make a wise purchasing decision.
Gross Yield – calculated here simply as the total annual rental income divided by the marketing price.
Net Yield is calculated as net annual income divided by the total purchase cost. We have simplified it as follows:
(rent – levies – R&T) * 12 / marketing price
No provision has been made for vacancy or maintenance, both of which will reduce the actual net yield, neither has rental commission been deducted as some owners prefer managing a unit themselves. The marketing price is not the same as the total purchase cost, which will be increased with transfer and bond costs as well as initial maintenance / revamping expenses, but might also be decreased if a lower purchase price is negotiated. Although the financial impact of many of these aspects are not clearly definable when the property is listed, the Net Yield calculated is still a very useful parameter to use.