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How to work out whether a property is worth investing in

by , 17 July 2015

Property can be a great long-term investment. You can look forward to rental income from your tenants and the value of your property rising over the years.

So if you want to start investing in property, how do you know when you've found a good property investment?

It all comes down to how much you pay for it and what you can expect to receive in rent.

Read on to find out how you can make the best property investment…


The importance of paying the right price for an investment property


One of the most important aspects of property investing is paying the ‘right’ price for a property in the first place.

If you pay over the odds for a property, it’s not going to make a good investment.

The price you pay for a property will relate to:

  • The type of property it is;
  • The size of the property; and
  • The location of the property;

These factors will also determine how much you can expect to receive in rent from the property.

If you’re not sure about how much rent a potential property investment could bring in, ask a rental agent for some advice.


How to work out if a property is a good deal or not


One way you can check whether the asking price of a property is worth paying or not is to work out the GRM (gross rent multiplier), Mark Ford in The Palm Beach Daily explains...

A good guideline to follow is never to invest in a property that has a GRM above 8.

The GRM ratio tells you how much you should pay for a property taking into account the amount of income you can expect each year in rent.

The GRM formula is:

GRM = Selling price/gross annual rents

It works like this…

Let’s say you’re really interested in a property that looks likely to achieve R8,000 in rent a month. That’s R96,000 a year (R8,000 x 12). Using the GRM ratio, this means you shouldn’t pay more than R768,000 (8 x R96,000) for the property.

If you can’t buy the property for less than this amount, you shouldn’t invest.

So there you have it. How to work out whether a property is worth investing in.

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How to work out whether a property is worth investing in
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