An analysis by Daily Investor revealed that buying gold was a much better investment over the past 50 years than buying property for rental income in South Africa.
Many believe buying and owning property is one of the best ways to generate wealth. Property is generally seen as a safe, risk-averse investment that can create wealth and, in some cases, extra income if one rents out that property.
Gold, in comparison, is seen as a speculative asset that provides a safe haven for investors during uncertain times.
While many people invest in gold to diversify their portfolios and hedge against inflation, it is not generally seen as a way to get rich.
Daily Investor analysed the return on rental income to see whether these perceptions hold up.
According to the Absa Property Index, the average South African property cost R15,084 in 1970. In the same year, the price of gold averaged $36 per ounce.
In a previous article, Daily Investor compared an identical investment in gold and property in 1970 and their price returns over 50 years.
This analysis revealed that gold significantly outperformed the capital growth of property in South Africa over that time frame.
In other words, the value of gold would have been worth more than the value of the house, assuming it was the investor’s residence and not a rental property.
Gold is an international asset priced in USD, meaning it has delivered exceptional returns over the long term from a South African perspective.
Similarly, property is a long-term asset that delivers meaningful returns in the long run.
Therefore, comparing property to gold over a long period is appropriate.
When one considers property as an investment for rental purposes, both capital gains and rental income become relevant.
Daily Investor, therefore, made the same comparison between a R15,084 investment in property and gold from 1970 to 2023 but considered a property that is not the investor’s residence but a rental property.
In other words, the rental income from the property was taken into account.
Using data from the Global Property Guide, Daily Investor used rental yields from Johannesburg, Centurion and Cape Town to calculate an average annual rental yield of 10%.
Using the Absa Property Index, Daily Investor calculated the R15,084 property’s value each year from 1970 to 2023 and found that its value increased to R2.3 million.
Based on each year’s valuation, the rental income was then calculated.
The assumption was made that the rental income from each year was invested in a way that could match each year’s inflation rate from 1970 to 2023, thereby adjusting each rental payment to the purchasing power of “today’s” money.
From each year’s rental income, subtractions were made for annual maintenance (1% of the value per annum), water and electricity (1.5% of the value per annum), levies (1% of the value per annum), and rates and taxes (0.7% of the value per annum).
These expenses would have been as follows in 2023:
- Property value – R2.35 million
- Monthly rental income – R19,604
- Monthly maintenance – R1,900
- Monthly rates and taxes – R1,370
- Monthly levy – R1,900
- Monthly water and electricity – R2,900
After investing all rental income in an inflation-matching investment, the present value of the total invested rental income pool would be R4.4 million.
Since the value of the property would be R2.3 million in 2023, this brings the total ending value of the property investment to R6.7 million in 2023.
If the same R15,084 had been invested in gold in 1970, investors would have been able to buy 546 ounces of gold.
At the current gold price of R38,555 per ounce, the present value of 546 ounces of gold is R21.07 million.
Therefore, over the 50-year period, an investment in gold has outperformed the total returns from an investment in property held for rental purposes.
|Total property income