Building a Rental Flatlet to Help Pay Off Your Home Loan

Building a flatlet on your property can do more than provide extra space. If you rent it out, the rental income can help cover your monthly home loan and potentially reduce the time it takes to pay off your bond.

But does the maths actually work?

A Simple Example

Let's say your home loan repayment is R15,000 per month.

You build a one-bedroom flatlet and rent it out for R7,000 per month.

Your rental income would be:

R7,000 × 12 = R84,000 per year

If you used that income towards your home loan, you would effectively have an additional R84,000 a year going towards the property.

Over 10 years, that is:

R84,000 × 10 = R840,000

That's before considering interest savings from paying the loan down faster.

What Does the Flatlet Cost?

Suppose the flatlet costs R600,000 to build.

At R7,000 rent per month, the basic rental income would be:

R600,000 ÷ R84,000 = about 7.1 years

This is a simple payback calculation and does not include maintenance, vacancies, rates, utilities, financing costs or other expenses.

Don't Forget the Costs

The full R7,000 rent isn't necessarily available to put towards your bond.

You may have costs such as:

• Maintenance and repairs

• Insurance

• Rates and other property costs

• Utilities

• Periods when the flatlet is vacant

• Letting or management fees

• Income tax implications

For example, if your average costs reduce the usable rental income to R5,500 per month, that's:

R5,500 × 12 = R66,000 per year

The R600,000 construction cost would then take about 9.1 years to recover through rental income.

The Bigger Picture

The calculation isn't simply:

Rent × 10 years = profit

You are also adding an additional usable space to your property, which may increase its overall value.

The real question is whether the cost of building the flatlet is reasonable compared with the rental income it can generate.

Before starting, calculate:

Estimated building cost ÷ annual realistic rental income = simple payback period

Then allow for expenses and vacancies.

A flatlet that costs R400,000 and generates R7,000 a month is a very different proposition from one that costs R800,000 and generates the same rent.

Get the Numbers Before You Build

Before spending money, work out the expected construction cost, realistic rental income and ongoing expenses.

A building cost estimate can help you establish what the project is likely to cost before you commit to construction.

The goal isn't simply to build a flatlet. It's to build one where the numbers make sense.