Investing in property in townships in South Africa can be a highly profitable and rewarding experience. If you’re considering investing in township property, there are several options to consider, including renting out back rooms, renting out houses, and buy-to-let. In this article, we will explore the different ways to invest in property in townships and provide tips for success.
Renting back rooms in townships
One of the most popular ways to invest in property in townships is by renting out back rooms. This involves renting out a room or rooms in your own home to tenants. To be successful as a landlord, it is important to thoroughly screen tenants, set clear expectations, and maintain the property to a high standard. Additionally, it’s important to research the rental market in the area and set your prices accordingly.
There are property investors that partner with homeowners in many of these townships where the investor brings the money to the table and the owner manages the tenant. The rental income is divided between the owner and property investor for a term (normally 7 years). Once the term is completed, the owner gets the full rental going forward.
Renting full properties in townships
Another way to invest in property in townships is to purchase a property and rent it out as a whole. This can be a more profitable option than renting out back rooms, as you can (theoretically) charge higher rent for a whole house.
If you decide to build a property in the township, you need to keep your eye on the costs, as they often spiral out of control. Please work with the locals, as they know the areas and places where you can get cheaper materials.
To be successful in this approach, it’s important to research the rental market in the area. Townships like Soweto, Katlehong, and Alexandra offer excellent opportunities for purchasing property for buy-to-let.
Communes and hostels in townships
Hostels in townships rent out beds or rooms to travellers or local residents in need of temporary accommodation. Historically, there have been some issues in these hostels, and this is not recommended unless you’re well-connected with locals and people who know the industry well.
Hostels focus on cheap accommodation, and therefore you will need to focus on key factors such as location, facilities, and pricing to stay competitive.
How can I invest in township properties without involvement?
Investing in a REIT that invests in townships
There are some REITs such as Exemplar REIT that specialise in township retail property. This means you can invest in township real estate without involvement. You can buy many of the REITs on platforms such as EasyEquities.
A Real Estate Investment Trust (REIT) is a publicly traded trust that invests in a professionally managed portfolio of properties – and you can invest without having to purchase a property directly. By pooling money from multiple investors, REITs can purchase and manage properties that would otherwise be too expensive for an individual to own. REITs pay out > 90% of their taxable income as ‘dividends’.
Partnerships and joint ventures
Many people don’t want to get involved personally in the day-to-day running but want bigger returns compared to the big REITs offer. Although there is a greater risk, partnering with an investor can pay off well.
Please don’t go into a partnership with just anyone – it’s risky!
Calculating the Profitability of Township Rental Investments
I asked around on Twitter about how much a back room can rent in townships. I was shocked that some claimed it could be up to R 5 000 per month!
Most of the people claimed it was about R 2 500 per month for an ensuite room with no kitchenette for places such as Mamelodi, Diepsloot and Soweto.
I spoke to my wife who is in the building industry who said one can look at about R 7 000 a square. Thus, you will need to pay about R 105 000 for a 15 square meter room.
How much does a room cost to rent in Soweto these days?— Frugal Sibusiso 🇿🇦 (@FrugalLocal) January 26, 2023
We thus have a rental factor of almost 2.5 if you get rent of R 2 500 per month before deducting rates and taxes. This, in anyone’s books will be an excellent ROI for property investors!
When investing in property in townships, it’s important to be aware of the potential risks. The political and economic climate in South Africa can be unstable, and this can impact the rental market. Additionally, the condition of the property can deteriorate over time, and this can lead to increased costs for repairs and maintenance. It’s important to be aware of these risks and to invest accordingly.
In conclusion, investing in property in townships in South Africa can be a great way to generate income and grow wealth. Whether you choose to rent out back rooms, rent out houses, or invest in buy-to-let, it’s important to research the market, maintain the property well, and be aware of the potential risks. With the right approach, investing in property in townships like Soweto, Katlehong and Alexandra can be a profitable and rewarding experience.