When professionals join the residential property buy-to-let fad, it may be time to look at it yourself.

The market has been growing for six years and is showing no signs of running out of steam, despite investment returns dropping from over 15% to around 10% as price rises in Johannesburg outstrip rents.

Financial adviser Lionel Karp has bought a flat in Illovo, Johannesburg. So has one of SAs top property asset managers, who is responsible for a portfolio of more the R1bn (he does not want to be named).

Karp bought a one-bedroomed flat for R237000 at Foxhill, a block newly converted to sectional title by developers Harry Lewis and Neville Schaefer. The asset manager bought a two-bedroomed unit in the same block for R300000.

Their initial yield will be about 10% on their first years rent after paying levies and net of legal and mortgage bond costs.

Both know they can get 14% on the lowrisk, highly liquid Grayprop property unit trust, with fair capital growth prospects. So why buy a flat?

Partly personal, says Karp. Im hoping my son will eventually live there. But it also makes sense as part of my personal investment diversification plan. He believes a conservative portfolio should have 40% gilts, 30% equities, 10% property and 20% offshore. A more aggressive portfolio would have 60% equities (at least half local, the rest offshore), 20% property and 20% gilts.

He says the higher the proportion of property in the aggressive portfolio, the more capital growth it will generate. This is despite average residential property prices having risen only 72% in the past six years and 22% in two years.

Prices have risen much faster in Illovo and other prime areas, however.

As a new conversion, Foxhill has no history of capital appreciation. But a onebedroomed flat in a prime block close to Sandton CBD, De Medici, has risen from R250000 in May 2000 to R360000 today a 44% increase.

Rents have risen only 25%, which means initial yields have dropped from about 13% to the 10% Karp is now getting.

But he, like many property experts, expects growth to continue. On reasonable rent and capital growth estimates, Schaefer, CEO of residential property company Trafalgar, says Karp can expect a compound total annual return of over 20% over the next six years (see table).

After paying a R50000 deposit, Karp has a manageable reverse cash flow of about R400/month. Schaefer says rent should grow by 8%/year, giving Karp a net rent of about R15000/year in the sixth year after paying bond interest and running costs.

Karp could add another R4000 to that income if he finds his tenant himself and doesnt incur agents commission.

Karp did buy in a prime area. The position is important, he says. It is in a safe area of Illovo with good security next to Thrupps shopping centre and near Wanderers golf course. It will be easy to let a one-bedroomed flat to a single, young or elderly person . So I will always have a tenant.

But his decision to buy at Foxhill was primarily for the lifestyle return, which he separates from risk-adjusted return.

Financial Mail