Buy-to-Let Calculator (South Africa): Is a Rental Property Worth It?

It can be, but far less often than the gross yield suggests, and only if you go in with your eyes open. On a small deposit most rental properties run at a monthly cash-flow loss at first, because the bond, rates, levy, insurance, maintenance and a managing agent add up to more than the rent brings in. That does not automatically make it a bad deal, part of each bond instalment pays down what you owe, which is equity you keep, and the property may grow in value. But it does mean buy-to-let is a long game that ties up cash and carries real risk, vacancies, a tenant who does not pay, a special levy, a rate hike. The calculator above shows you the honest monthly cash flow, the yields, the tax and a rough total return, so you can judge a specific property rather than a slogan.

SARS treats rental income like any other income. You add the rent you receive to your taxable income for the year and pay tax on the profit at your marginal rate. Crucially, you may deduct the running costs of letting the property, rates, levies, insurance, a managing agent's fees, repairs and the interest portion of your bond, but not the capital you repay on the bond and not the money you spent buying the place. If your allowable costs come to more than the rent, you make a rental loss, which normally reduces the tax on your other income such as your salary. The calculator estimates the tax or the saving and folds it into your after-tax cash flow.

Only the interest part, not the whole instalment. A bond repayment is made up of interest, which is a cost you can deduct, and capital, which pays down the loan and is not deductible because it is not really an expense, it is you buying more of your own property. In the early years most of the instalment is interest, so the deduction is large, but it shrinks every year as the loan is paid down. This is one of the most common mistakes new landlords make, claiming the full bond repayment, and it is exactly why the tool separates the interest from the capital when it works out your taxable rental profit.

As a rough guide, a gross yield below about 7 percent usually means the rent is low for the price and the deal will lean on capital growth to work. Between roughly 8 and 11 percent gross is a healthier starting point, and student or lower-priced areas can push higher. But gross yield ignores every cost, so the number that matters is the net yield, the rent after rates, levies, insurance, maintenance, a managing agent and vacancy, divided by the price. A net yield in the region of 5 to 8 percent is a realistic target for a well-chosen South African rental. The calculator shows gross, net and cash-on-cash side by side so you are not fooled by the flattering one.

Negative cash flow, sometimes called negative gearing, means the rent does not cover the bond and the running costs, so you top up the shortfall from your own pocket each month. It is very common on a buy-to-let bought with a small deposit, because the bond instalment is large. It is not automatically a bad thing, you are still paying down the loan and the property may be growing in value, and the loss usually saves you some income tax. But it does mean the property costs you money to hold, so you need to be sure you can afford the monthly top-up and that the growth and equity will eventually make it worthwhile. The tool shows both the cash you put in and the equity you build, so you can see the real picture.

Yes. A property you rent out is an investment, not your primary home, so it does not get the R2 million primary-residence exclusion. When you sell, your capital gain is roughly the selling price less the selling costs and your base cost, which is what you paid plus the transfer duty, transfer attorney fees and any improvements. For an individual the first R50,000 of gains in a year is excluded, then 40 percent of the rest is added to your taxable income and taxed at your marginal rate, so the effective rate tops out at about 18 percent. The calculator gives a rough capital gains tax estimate when you set a holding period, but a tax practitioner should confirm the figure before you sell.

It matters because repairs are deductible against your rental income now, while improvements are not, they only add to your base cost and reduce capital gains tax when you sell. A repair restores something to its original condition, fixing a leak, replacing a broken geyser, repainting. An improvement makes the property better or bigger than before, adding a room, building a carport, putting in a pool. SARS watches this line closely, so keep your invoices and be honest about which is which. When in doubt, ask a tax practitioner, because getting it wrong in either direction costs you.

Banks often ask for a larger deposit on a buy-to-let than on the home you live in, commonly 10 to 20 percent, and sometimes more, because a rental is seen as higher risk. A bigger deposit means a smaller bond, a smaller instalment and a much better chance of positive cash flow, but it also ties up more of your cash, which could be earning elsewhere. There is a real trade-off, and the calculator lets you change the deposit to see how it swings the monthly cash flow and the return on the cash you put in. Remember you also need the transfer duty and legal costs on top of the deposit.

Gross rental yield is the annual rent divided by the purchase price, times 100. A property costing R1.2 million that rents for R9,000 a month has a gross yield of 9 percent, that is 9,000 times 12, over 1,200,000. Net yield is the more useful number, take the annual rent, subtract the running costs like rates, levies, insurance, maintenance, a managing agent and an allowance for vacancy, then divide by the price. The calculator above works out both from your own figures, plus the cash-on-cash return on the actual cash you put in, so you see the honest yield rather than the flattering gross one.

The cap rate, short for capitalisation rate, is the property's net operating income, the rent after running costs but before any bond or financing, divided by the price. It is the same figure this tool calls the net yield, and it tells you what the property earns on its own, regardless of how you paid for it. A cap rate around 7 to 10 percent is typical for South African buy-to-let, though it varies a lot by area and property type. Because it leaves the bond out, two buyers of the same property share a cap rate but can have very different cash-on-cash returns depending on their deposit.

You pay tax on the profit, not the full rent. Take the rent you receive, subtract the deductible costs, rates, levies, insurance, a managing agent, repairs and the interest portion of your bond, and what is left is added to your other income and taxed at your marginal rate, anywhere from 18 to 45 percent. If the deductible costs come to more than the rent, the loss usually reduces the tax on your salary. The calculator estimates the tax, or the saving, at the marginal rate you choose and folds it into your after-tax cash flow, so you see the real monthly number.

No. This is a general information tool to help you weigh up a rental property with your own numbers, not personal financial or tax advice. It simplifies real life, it assumes a steady interest rate, smooth growth and that costs rise with rent when all of these are bumpier, and it works in the rands of each year rather than today's money. Rental property carries real risks the tool cannot capture, a bad tenant, a long vacancy, a special levy or a market that stalls. Use it to understand the shape of a deal and what moves it, then check the detail with a bond originator, an estate agent who knows the area, and a tax practitioner before you buy.