Should You Sell Or Rent Your House in Cape Town South Africa?
Should You Sell Or Rent Your House In Cape Town?
Selling or renting is not straightforward. It depends on your circumstances; your goals, your needs, your fears, the current real estate market, your property’s location, the rental market and the rental options you may prefer.
I will not really discuss long term rentals as an option because I have been there. We did it. We got the T-shirt; if it works it works. But if the long term goes wrong you may be in it for the long haul.
I intend to give you the pros and cons of selling or renting your home in Cape Town. But I’ll argue that short term rentals are your best option if you decide to rent.
Examples Of Renting Or Selling Your House in Cape Town?
Various reasons exist for you to consider selling your home. The question is; which will be the best investment; selling or renting. And then, if you decide on renting you should decide on long term or short term rentals (like Airbnb). Here are a few examples of why people may want to sell or rent.
- We have a house in Simonstown. Simonstown is a great location; 5 mins to the sea and the mountain is on our back yard. But we wanted to experience another Cape Town suburb and looked around. Nandi lives in Green Point. The city buzz intrigued us. You don’t need a car. And an Uber is only R26 to the Water Front. We can walk, drink coffee and have fun. But will we like it?
- A lady with a house next to ours wants to move into a flat on her daughter’s property in Camps Bay. And she wants to sell.
- Your move may be temporary; you plan on returning to Cape Town or a suburb in the future. For example, a friend of ours is a digital nomad working from his yacht in the USA for two years. He decided to long term rent his Cape Town home to a work colleague. No agent involved. It is not turning out well; the tenant has stopped paying.
- You are retired. And may want to scale down. Many people in this situation may not need the cash from selling but would like a regular income.
- You may sit with a second house and it’s not selling. It can be due to the market or the price. And you may not be interested in the current offers. What do you do with the home? If you rent it you can earn an income but you may be sceptical about rentals.
What Is The Most Important Question Regarding Renting Or Selling Your House in Cape Town?
If you must have the money from your house sale for any current needs then sell it. But if you don’t need the money then look at the alternatives. In other words; if you don’t need the cash from a sale you should consider renting out your home.
Above, I mentioned we are renting (Airbnb) our home in Simonstown. And kitted out a lock up and go in Green Point to check out the city scene.
We were not convinced. And if we sold and just bought another home in another suburb we would be locked in. Really stuck. No one knows a suburb until you sleep through it, wake up next to a neighbour barking at his kids. Or listen to the hadidas, the squirrels skinniving on the roof, or the ambulances hailing going past.
Now we can move back to Simonstown any day. Any! Because we chose short term.
Have You Considered These Issues Regarding Selling or Renting?
When you sell it’s final. You don’t have the flexibility any longer. Now you need to either buy another home or invest the money elsewhere.
This leads us to issues to consider when you look to sell or rent your house in Cape Town:
- If your ability to buy a new home relies on accessing equity currently tied up in your home, then selling it is the best way of doing so.
- If you go the route of renting your current home and want to buy another one with a mortgage, keep in mind that lenders will consider rental income when determining your financing.
- If you expect that your current home’s value will increase within a few years or less, you might want to consider renting it out and then selling it, later on, to take advantage of appreciation.
- If you’ll pay capital gains tax and don’t want to, then you may want to rent it.
How Much Money Can You Make With Home Rentals In Cape Town?
Assuming you are considering renting out your home; how much can you make or should you make?
According to GlobalPropertyMarket gross rental yields in Cape Town range from 5% to 8.3%. This means if you have a property worth R5 million then 5% to 8.3% equals R21 00 to R34 583 per month or R252000 to R414 996 per year. The same figures for an R10 million home would be R500 000 to R830 000 per annum or R42 000 to R69 000 per month.
Let’s go to the extreme; this home rents out for R180 000 per night (and there are more). But don’t let this fool you. The most expensive property in Clifton is about R200 million. At 8.3% gross rental yield gives you R1 .4 million per month. If this homeowner rents his home for less than 8 nights per month he earns 8.3%. Not bad. He has obviously created an extreme perception of value.
Rental’s Money-Making Strategies Can Fool Some
Well. There are many ways to climb Table Mountain; with the above example, you can also make R1.4 million per month at R46111 per night if someone stays for 30 nights.
Which is more likely?
- R180 000 per night for 8 nights
- R46 111 per night at 30 nights
- R100 000 per night for 14 nights
What am I trying to show you?
Don’t be a fool. If you don’t care if you make the money then great. But if you want a return then rather have more flexible rates; if people stay for long give them better value.
We have learned that your rental rates create a perception of value. But that does not mean you’ll make money. As they say, “the proof of the pudding is in the eating”. When you consider to sell or rent your house be flexible. Be adaptable.
Let me get back to reality!
The question is will your home rental yield 5% to 8.3%? On average you should. But why not get more? I believe the yield estimates are reasonable. But as you saw above; there is a massive difference between 5% and 8.3%.
What are The Pros and Cons Of Renting My Home Vs Selling My Home?
We have discussed some of the pros and cons of the decision to sell or rent your house in Cape Town, but let’s dive a little deeper:
Pros: What Are The Benefits Of Renting Out Your Home Instead Of Selling It?
- Let’s consider our case; we have a home; instead of selling it, we are renting it out; at nearly double what we are renting a lockup and go in Green Point.
- You’ll have access to a steady stream of income that is not dependent on how much your property appreciates or depreciates.
- If you have a bond the payment will go down which could free up extra cash flow each month.
- Buying a house to live in, with the proceeds from the sale of your home, will lock your capital in. It’s long term. But when you rent your home your options remain. If you do a good rental job you can earn a good income and have the flexibility to sell if you get a good deal.
- Finding someone to rent your home is a lot easier than trying to sell a home. A home may sell quickly but some take longer. And if you don’t have to sell it, it makes no sense.
- Let’s assume you rent out your home and rent another home in another area; this gives you flexibility, an opportunity to learn about the neighbourhood, you are not stuck for long. After 6 or 12 months you can move. And if you are like us you can even make extra money.
- We all know Cape Town is a tourist destination. And a very well run city. Properties as an investment do well. And the rental market is strong. Therefore you have three forces; tourism and their need for accommodation, long term rentals and residential buyers. Getting a good rental for your home is very possible; the question will it be long term or short term? More on this topic later.
Cons Of Long Term Rentals:
Long term rentals can be great. But it has its limitations as well. It boxes you in.
- If you can rent out your property, it could generate a steady income, but the return on investment doesn’t typically happen right away. The housing market and your ability to keep it rented affect rental property investments.
- Renting out your house could be a hassle because you have to deal with the tenant or an agent.
- Obviously, you’ll not get as much (immediate) money from renting out your house as selling it.
- The house is not available to you; you don’t have easy access to the property to make any changes or improvements that you want in order to increase its value.
- There is no guarantee that you will get a great tenant.
- There could be damage or loss while the tenants are living there.
- You may not get the rent you want.
Pros: Short Term Rentals Have More Advantages Then Long Term Rentals
You don’t want to be tied down to a long term lease agreement. You don’t want to sit with one tenant creeping under your skin for 12 months. You just don’t have the flexibility.
- Short term rentals on Airbnb are a lot more adaptable than long term rentals. Before the guests become a drag they move out. It’s only temporary and there are always new people coming in and out of the house.
- You can use the house for your friends, family and when you need it. With long term rentals, you don’t have easy control over what happens inside or outside of the property since it’s “owned” by someone.
- With short term rentals doing renovations is easy. You just block the dates and do the work.
- If your occupancy is too high increase the rates. If the occupancy is too low reduce the rates. But in the long term; if you rent it too cheaply you are stuck. If it’s too expensive it takes a while to adapt.
- When you rent long term your income is fixed for the next 12 months. But with short term rentals, the income depends on your rates, number of reviews and occupancy. See the example below.
- It’s your home and you are still in control. At least more so than long-term rentals.
- Semigration and digital nomad travel trends very few people are taking note of. Cape Town is not only an activity tourist seeker paradise. No. People travel here to work – nomad. Others buy property but work in Johannesburg.
Example: Short Term Rental Income Opportunity:
Assume you have a home of R5 million. You would love to make more than 8% but you don’t know-how. You are willing to start at a gross rental yield of 5% doing short-term rentals or R250000 per year or R20833 per month. At 40% occupancy per year, he needs to rent for R1717 per day. Or at 50% occupancy, he must get R1388 per day. I prefer the 50% occupancy at R1388 per night.
Given that excellently run Airbnbs can do +80% occupancy and that summer rates are much higher than the average daily rate there is an upside with short term rentals: Assume this is an excellent host, with SUperHosts status and 100 of reviews with an occupancy of 80%.
At 80% occupancy, this owner can gross R405 549 with her R5 million home. Not bad at 8.1% yield.
This example emphasises the flexibility and adaptability you have with short term rentals.
Cons: Why Is Short Term Rentals Not An Ideal Option?
Airbnb would not be this popular if it did not make money! But does it mean you will make money with Airbnb? No. There is no guarantee. Most hosts on Airbnb are average Joe’s. And they make very little money. They are like cannon fodder; they make up the numbers.
If you have what it takes and understand the mechanics of supply & demand, trust (no of reviews) and making love to Airbnb then you’ll succeed. If not don’t waste your time. It can be a slow and long painful learning curve.
These are some issues you need to consider before going into short term rentals:
- It takes a lot of time and commitment to be a host.
- The average Airbnb host has an occupancy of 17.1% with an income of between R12000 and R15000 per month. Therefore, if you are average then don’t expect to get close to a gross rental yield of 5% to 8%. (LearnAirbnb.com Study* 2016)
- Airbnb may be simple but to succeed is not easy. Very few win with Airbnb. The top 1% of Airbnb hosts significantly outperform the bottom 99% by earning 19% of the overall rental revenue. (LearnAirbnb.com Study* 2016)
- Airbnb hosts are exposed to risks; bad guests, cancelled bookings, bad reviews, parties etc. More on Airbnb risks.
- Short term rentals require a furnished home. This may be an extra expense.
- Many owners are concerned about the excessive usage of their homes. Unfortunately, they ignore the drivers of supply and demand. As occupancy increases the rates increases. Or higher rates may slow down occupancy.
*LearnAirbnb study, “The State Of Airbnb Hosting Airbnb Reviews Study” using a dataset of nearly 6 million bookings from over 430,000 Airbnb listings and 250,000 Airbnb hosts across 200+ cities during the 12 month period from October 2014-October 2015.
What Factors Will Increase My Home Rental Rates In Cape Town?
Sell Or Rent Your House:
It’s no secret that Cape Town has been growing in popularity and is becoming a hot destination for tourists. And what do tourists and residential buyers have in common? First, they decide on an area. Then they tailor their location requirements according to their budget.
The main drivers for rental rates are tourists, long term renters, and residential buyers. If any one or more than one of these drivers are absent the rental rates would be less. Let’s consider these…
- Real estate agents always say the most important 3 criteria are location, location location. This is why Clifton is the most expensive suburb in Cape Town. In more general terms: If your home is very close or to the beach, your rental will do well. (Tourist, long term renters, & residential buyers).
- If you are out in suburbia then proximity to schools and employers – then these may align with potential renters’ needs or desires. (Less tourist and maybe budget tourist, budget long term renters, & residential buyers). The City Bowl of Cape Town is an excellent area where business travel, holiday stays, residential buyers and long term renters meet.
- Suburb location; the further the suburb is from the Vape Town city buzz the demand for lessons. The suburb may be an excellent tourist destination, but demand for business people looking to rent long term is low. For example Simonstown; it’s a great tourist destination with residential buyers but very little business demand. The extreme would be Scarborough; it’s a destination with virtually no business.
Who Needs A Pool At The Sea? Only A Fool!
- The next important attributes are outer design, interior design, functionality, views, and pools. And then bells and whistles; like gyms, steps, lifts etc.
- Many owners would discount a pool by saying, “there’s the sea why do we need a pool?” Tip: Not having a pool is a bad choice. Rentals with a pool, and more so for the tourist market, will increase the income a lot.
Why Should You Not Sell Your Home in Cape Town South Africa?
Great question. If you have read the above and considered your options to rather rent your home you must have a good reason to sell your home. Selling will make a lot of cash available, but then the risks start; how do you invest it well?
To keep your home and rent it is like using your home to generate rental income and not only capital gains. If you can rent a second home at less than what you are renting your home for then you are winning.
And many property investors rent long term, fix the rental, furnish it and then rent it out for more using Airbnb. This is called rental arbitrage.
What is Airbnb Rental Arbitrage Rental Investment Strategy?
‘Rental arbitrage’ is a strategy of renting a property long-term and then short-term renting on platforms like Airbnb and HomeAway. This is a business model that typically has minimal start-up costs and profits, meaning that it poses a little risk — and yes, it’s legal. (Arbitrage as defined by Wikipedia)
What Have You Decided? Will You Sell Or Rent Your House in Cape Town South Africa?
Let’s summarise this long article on the question: sell or rent your house in Cape Town?
You may be asking yourself whether to sell or rent your property in Cape Town South Africa. If you’ve got the option to do either, it’s typically better to choose to rent unless there are other factors that would make selling your house a more attractive investment opportunity for you.
For example, if you’re looking at a short-term rental and expect prices of similar properties will increase by 10% over the next five years, then it might make sense for you to hold onto your property rather than selling right now.
Given Cape Town’s record as a city, the semigration of people, digital nomad tourism selling your home is not an ideal investment decision. Rather renting it out. If you do it well it will give you a gross yield of 5 to 8%.
The question you need to get your mind around is; will it be long term or short term rentals.
Depending on your situation, location and design of your home we would recommend short term rentals.
Are You Not Yet Convinced Short Term Rentals Are Ideal?
Will you sell or rent your house in Cape Town?
It’s not straightforward. But to assist you, we have compiled an ebook on how to Unhassle your Airbnb. The ebook is free. It takes you through the concerns, the risks and the opportunities. After reading it you should know if you and your home are ideally suited to Airbnb.Get Your Free Unhassle Airbnb eBook Here