Question

We will be retiring at the end of the year and have several investment properties in Cape Town that we rent out.  We want to use the income from these properties to supplement our pension. 

I recently took a close look at the rental income we were getting and when I deducted the costs of the levies and insurances and realized that these properties are only generating an after cost income of R22,000 a month which is less than the R30 000 that we need.  The properties are worth R9m. 

What should we do?

Answer

There is a lot of merit in buying property when you start out on your financial journey. The big advantage here is the concept of leverage. You pay a deposit on a property and take out a loan for the balance of the purchase price.  Over the years, you get the capital growth on the full value of the property (not just your deposit).  If your monthly bond repayments are pretty much the same as the rental you have been paying for the property, then the propertyis a great way to build up long-term wealth.

However, when you reach retirement, the financial dynamics of property ownership change. Your bonds should have been settled so you effectively own an asset with a capital value.   You now need to make a call on whether the capital growth and rental income on this asset is better than investing in something else like a balanced fund.  At this stage of your life, income, rather than capital growth is the more important factor.

I will run through a couple of the factors that you should consider when trying to make a call as to whether to keep or sell your rental properties:

Income
Rental properties that are not actively managed can underperform. Rent may not reflect current market rates, especially if there’s reluctance to increase it for long-standing tenants. In your case, the properties generate R22,000 per month, but your target is R30,000. It may be worth consulting a rental agent to assess whether your income can be increased.

Tax and Costs
Rental properties come with ongoing costs — levies, insurance, rates, and management fees. These reduce your effective income. It’s also important to remember that this net income is fully taxable at your marginal income tax rate, which can significantly reduce what you take home each month.

Alternative Investment Option: A Balanced Fund
If you’re not emotionally tied to the properties, you may want to consider selling and reinvesting the proceeds into a flexible investment like a balanced fund. This can offer several advantages:

• Income: A well-structured balanced fund can support a sustainable withdrawal of around 5% annually. On a R9 million investment, this translates to a monthly pre-tax income of approximately R37,500 — significantly more than your current rental income.

• Tax: Most of the income from a balanced fund is treated as a return of capital or as capital gains, both of which are taxed at lower effective rates than rental income. Only 40% of capital gains are included in your taxable income, making this structure more tax efficient.

• Risk: A balanced fund spreads your investment across asset classes — equities, bonds, cash, and property — reducing the concentration risk that comes with owning just a few properties in a single location.

• Involvement: Properties require ongoing attention — tenant management, maintenance, and the risk of vacancies. A balanced fund is far more hands-off. Once set up with the help of a trusted adviser, it requires minimal involvement.

• Liquidity: Accessing capital from property is slow and usually requires either selling or taking out a bond. A balanced fund provides much easier and faster access to capital, offering flexibility if your needs change.

If increasing your rental income is not feasible, it may be worth selling one or more properties and reinvesting in a balanced fund. This could give you higher income, better tax efficiency, less hassle, and a more flexible and diversified retirement strategy.