I am a 35-year-old male who bought a townhouse in mid-2019 for R899 000 in a decent suburb that is part of the older Pretoria East. Attorney fees cost R35 000, and I had some upgrades done to the value of R50 000. It was used as my primary residence for about two years before I rented it out. The bond has since been settled with the bank, and I have the title deed in my safe.
After some thought, I wondered if it was still worth it to keep the property and rent it out or sell it and invest the money.
The estimated property valuation is currently at around R1 035 000. Should I sell through agents, pay commission, have some painting done, and pay certificate of compliance costs, I should be left with around R975 000 to invest.
This is a sad number, as I don’t break even once I factor in the upgrades done to the property as well as bond and attorney fees upon purchase.
Here is where I need some help:
The rental income is R8 625 per month
- Agent fees: R518 pm
- Rates and taxes: R478 pm
- Levies: R1 850 pm
- Electricity: (prepaid; for tenants’ account)
This leaves me with a net amount of R5 779 pm that is added to my gross salary and fully taxed.
Property experts claim the average house price growth in Gauteng is 3% a year. While this may be the case, it does not feel like the property value has grown much in my six years of ownership.
I also need to consider the capital gains tax I will have to pay each year I rent out the property. If I decide to keep it, maintenance will be required every two to three years.
Since the property is paid off, I do not need the rental income to supplement my salary and can comfortably live without it. I also have no intention of ever moving back into the townhouse, as it will simply be too small.
My retirement funds are doing well; I currently have R1.1 million saved and will continue to contribute a decent amount every month, so this does not have to form part of the investment strategy.
Most banks only offer up to 8% in safe investment options, which makes it difficult for me to make this decision.
Based on the facts mentioned, purely looking at rand and cents, should I sell and invest or keep and continue renting it out? Where will the money grow the most?
Dear reader,
This is a great question and one that many property investors face. Looking at the numbers objectively to determine where your money will grow best is essential. Let’s break it down.
1. Evaluating your rental return
Your net rental income (before tax) is R69 348 per year. Since this is added to your salary, it’s taxed at your marginal rate – likely 35%, leaving you with around R45 076 per year.
Your rental yield (return on your property investment) is calculated as follows:
(Net annual rental income ÷ current property value) × 100
= (R69 348 ÷ R1 035 000) × 100
= 6.7% gross yield
After tax: ±4.4%
Read: Am I calculating the ROI on my rental property correctly?
Now, assuming the average 3% annual property appreciation, your total return (rental income + capital growth) is roughly 7.4% per year.
2. What happens if you sell and invest?
If you sell the property, you can expect to walk away with around R975 000, but we need to account for capital gains tax (CGT).
Capital gains tax breakdown
- Total cost (purchase + fees + upgrades): R984 000
- Selling price: R1 035 000
- Capital gain: R51 000
- Primary residence exclusion (for the two years you lived there): Partial R40 000 exclusion
- Taxable capital gain: ±R30 000
- CGT payable (at a 35% tax bracket, 40% inclusion rate): ±R4 200.
Read: Don’t make investment decisions based on potential capital gains tax
After CGT, you’d be left with approximately R970 000 to invest.
Investment growth potential
If you reinvest the proceeds in a well-diversified portfolio (such as exchange-traded funds, unit trusts, or a tax-free savings account), you could target 10-12% per year over the long term.
At 10% per year, your money could grow to:
- R1.57 million in five years; and
- R2.52 million in 10 years.
This outperforms the expected 7.4% return from keeping the property.
3. Key comparisons: Keep renting vs selling and investing
| Factor | Keep renting | Sell and invest |
|---|---|---|
| Net annual return | ±7.4% (rental + capital growth) | ±10-12% |
| Liquidity | Low (cash locked in property) | High (easier access to funds) |
| Risk | Tenant risk, maintenance, property market fluctuations | Market volatility (but diversified) |
| Effort required | Property management required | Set-and-forget investing |
Final verdict
Selling and investing is the stronger option since you:
- Do not need the rental income;
- Are not planning to live in the property again; and
- Can achieve higher returns with a diversified investment portfolio.
Selling and investing will likely yield better long-term returns with less hassle.
The only reason to keep the property is if you strongly believe Pretoria East will experience above-average property growth or if you prefer the stability of rental income. Otherwise, selling and reinvesting make more financial sense.
Listen/read:
Unit trusts vs property: Which leads to better returns?
Rental property vs listed equities: Which could make you rich?
Would you like guidance on structuring your investment portfolio after the sale? Let us know in the comments!
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