Property investment with smart rental income decision can outshine gold

An analysis by Daily Investor revealed that buying property and investing the rental income in the JSE All Share Index (ALSI) delivered better returns than investing in gold.

A popular belief among many is that purchasing and possessing real estate is one of the most effective ways to build wealth. 

Real estate is generally perceived as a secure and low-risk investment that can generate wealth and, in certain circumstances, additional income if the property is rented out.

Gold, in comparison, is seen as a speculative asset that provides a safe haven for investors during uncertain times but not a way to build wealth.

Previously, Daily Investor compared the returns of buying a house versus investing in gold over 50 years.

Daily Investor has also analysed the returns of investing the rental income from a property in an inflation-matching investment versus the returns of buying gold over 50 years.

In both these comparisons, gold came out as the clear winner.

However, another analysis showed that buying property and investing the rental income in the S&P 500 delivered a far greater return than investing in gold.

For this analysis, Daily Investor compared the return on rental income from a property if invested in the JSE ALSI versus investing in gold over 50 years.

Investing in one ounce of gold in 1995 would have cost R1,392, assuming no market frictions.

In 2023, the average price for an ounce of gold was R36,083, meaning it delivered a compounded annualised return of 12.33% over 28 years.

According to ABSA Property Index, the average house cost R172,285 in 1995.

Based on a combination of the ABSA and FNB property indices, this property would cost approximately R1.6 million in 2023.

This translates to a compounded annual growth rate of 8.3% in the house price over the same 28 years.

Daily Investor determined what would happen if someone invested the same amount – R172,285 – in gold and property in 1995 and if all rental income generated by the property, after expenses, were invested in the JSE ALSI.

From each year’s rental income, subtractions were made for annual maintenance (1% of value per annum), water and electricity (1.5% of value per annum), levies (1% of value per annum), and rates and taxes (0.7% of value per annum).

We considered rental yields from Johannesburg, Centurion and Cape Town, which provided an average rental yield of 10% annually.

Based on each year’s valuation, the rental income was calculated for each year from 1995 to today.

After all net income generated by the property was invested in the JSE ALSI, it delivered a total return of R4.22 million.

Adding the property value to the return from the rental income delivers a total return from the property of R5.81 million.

A R172,285 investment in gold in 1995 would buy 124 ounces of gold. At the average gold price in 2023, 124 ounces would be worth R4.47 million today.

Therefore, the property investment was worth over R1 million more than the gold investment over 28 years.

Investment	1995	2023
Gold	R172,285	R4.47 million
Total property return	R172,285	R5.81 million