Property vs savings
A Fin24 reader asks:
Should I save for retirement, if I can just buy a few properties and live off the rental when I retire?
Heather Robertson, a certified financial planner at Blink Consulting, responds:
When it comes to buying property as an investment, there are a number of things to take into consideration. These include:
To what extent will you have to subsidise the bond each month? These days you can expect to cover only 40% of your costs.
Property is a fixed asset which can take time to sell.
As you cannot pick up a house and move it somewhere else, how sure are you that the suburb or town is going to be a desirable area to live in five, 10 or 20 years from now?
It is true that no building will last forever, but you want a property that is low maintenance and well built.
- Fees, levies and unforeseen costs
Find out how much you will be paying towards rates, levies and upkeep and the rate at which these are likely to increase.
You will need to have cash available for maintenance (such as repainting), and to cover the bond if the property is unoccupied or if your tenant skips payment.
Understand that the profit you make when selling a property, as well as the income you earn from rental, could be taxable.
- Asset appreciation and interest rates
The boom in property that occurred at the start of the millennium came after a 20-year slump, during which property prices barely kept pace with inflation. In the past few years property prices fell.
It really only makes sense to borrow money to invest in property if the interest rate is low and the rental income is covering your bond, or if the property is appreciating at a very rapid rate.
There is seldom an easy, get-rich-quick road to retirement. I recommend speaking to a certified financial planner who can assist you in drawing up a financial plan suited to your individual goals and circumstances.
When investing in property, consider investing in a Property ETF like Proptrax (www.proptrax.co.za). Rather than paying off a bond, put in a few thousand rand every month with a debit order. The yields will probably be better than with buying a property. And no liquidity problems as well as the risk of tenants not paying or unexpected maintenance costs.
The return on investment cannot be better, as there is no leverage.
Going back to Investing 101. Property is meant to be riskier and less liquid, for more longterm return. The moment you pull anything out of the equation, you give up % of the return. Your ETF facilitators exist to be at the receiving end of it.
I moved from retirement savings to property and it was the best thing I ever did. Choose the right area, choose the right tenants, have a good credit record for good interest rates at banks and you will not go wrong.
There is risk in any investment .
What if the retirement annuity does not deliver the expected returns?
Donald Trump, Robert Kiyosaki and others al made wealth from property. It is tried, tested and works. It's working for me.
how many times has trump declared bankruptcy ? U S laws are totally different,
In the US you can get a tax deduction on your mortgage payments and other instruments.
SA is not the same as US and taxes in SA in many respects are higher than the US
Justin, which part is deductible in the U.S.? The installment? Cause that doesn't make sense to me, as the installment is a repayment of a capital amount borrowed, not an expense?
How about rental income plus an appreciating asset with capital gain.
Buy in the right area and it will start working or you now and not only at retirement.
Investor, I somewhat agree with your thoughts, and would pose the same argument myself, question is if i was in Zim 8 years ago and followed this advice would it have worked? Or better yeat if I was in the US would it have worked? How about the UK?
Seems that the 2008 crash would have ledt me little to retire on?
You are forgot about the expenses of houses! the super reliable tenants etc ! head out the sand!
When investing in other products you have to keep paying until retirement age to receive the expected illustrative returns.
With property you reach a stage when you can stop paying and the tenant will pay for your investment until retirement.
The date you stop paying is achievable long before regiment and you don't pay fees to an Adviser or Broker and expenses are tax deductable as they are expenses generated in the production of income.
I agree,spread your money
That might be true but also remember that ETFs do not require advisors or brokers. You can buy directly and at your own pace without having to worry about maintenance and the ever increasing property taxes. Also remember that estate agents charge way higher than many first-world countries such as Australia.
Spread the risk and don't only believe that property is the sole asset to wealth creation
Wow! I am left considering what I do with this information. What is the point of publishing this article.
"Should I save for retirement, if I can just buy a few properties and live off the rental when I retire?"
mmmmmmmmmmmmm i dont know ask somebody else.
Do both - you cannot go wrong by spreading your money across different investments.
Being a financial planner - I would suggest that you do both.
I retired at 45 going the property route. I take responsibillity for my own choices and don't make any payments to other people to look after my own money. A certified financial planner will be certain to take his cut of your money. Property has worked for me.
Ye ye, property has worked in the past how much longer will it work?
Tell me Nick what have the returns been the last 5 years? Have they kept up with inflation, high increases in utilities, taxes and petrol?
No they have not. Property has lost value, and ANC does not inspire confidence, also the rand is lower, so in real terms have you become allot poorer, and will continue to get poorer. I`m a CEA, I love property, but we need to be realistic here, past performance does not influence future performance. If you are losing money on a montly basis, then HOW CAN THIS BE A good INVESTMENT?
Nick, I retired at age 30, I am now 36 and property is still booming for me. I buy property in die Vaal Triangle area and if I need to take out a bond, the rent covers the bond 100%. I buy for R300k and rent out for R3500 after about a year, I put the property back in the market for R100k more than what I have paid for it. If you buy for the right price in the right area, you can't go wrong.....
Financial planning is not about "taking" some-one's money. If that the case, do doctors "take" your money when you are ill even though they cannot help you?
I personally think it depend on your age. I think the articale is very bias and definitly feel Heather is looking for a bit of comm there.
One assumes that at retirement the property is paid off, which will cover maintenance as well as levies and fees. Also rental will keep up with inflation.
Yes properities aren't liquid, but this is a long term thing to add on your pension? And yes, some areas can go down, difficult to tell on that one. As well as property wasn't in a 20 year slumb. About every 10 years property experiences a jump.
One risky part is the tenants, remember at retirement age you can get some nasty renters who are out there to use legal routes to stay with no pay, and you won't be as strong as you where back in the day to put up are hard fight.
Remember to weight up the options of Revenue, tax, interest, etc. Your total investment and returns for your life time and total investment on equities.
Hi Derrick, your comment"looking for a bit of comm," pray tell how do "estate agents" who are in the main unemployed housewives earn a living?
@ colin - you took the words right out my mouth lol
"Looking for comm"? I take it estate agents work for free?
It flabbergasts me that a financial planner is quoted when it comes to property investments. In general, financial planners are not property experts because they invariably do not generate fees from clients who invest in property; in fact, the client ceases to be such the moment property is selected as an investment choice. This article is proof of such educational inadequacy referring to ROI rather than ROE with the significant benefits of leveraging in property investments.
When considering property as an asset class, never ever consult a financial planner; their advice will be biased as they will not make annuity fees from property. Consult a Property Asset Manager or other professionals in the industry like property accountants.
Property requires active management and continuous assessment for buying, selling and diversifying across industry sectors as the market evolves. If you do not have expertise in property, appoint an asset manager while you learn the ropes.
Other asset classes (Cash, Equity and Bonds) have a role to play, however, Property returns measured by ROE have proven to be superior to these over the long term.
I completely agree with the majority of what you are saying. However, I thought i would just point out that firstly, there are easy ways of achieving significant leverage through the use of equity instruments as well, and secondly in the long term, stocks have actually outperformed property on the JSE over the last 20 years.
You right, but, fin planners can give you a very valid opinion as it is an investment, and activities of fin planning revolve around investments. Its not hard....
@Matthew - you are 100% correct! Property is cyclical and depends on a number of factors. If you bought the right shares you could easily have tripled your money over the last 5 years. Property is not going to boom like it did before. Sorry, but the party is over and until oil drops below 100$, then we can start talking property "boom" again
Personally, I think it`s time to sell in SA, nothing convinces me that there will be any good returns, rental income does not keep up with inflation.
In fact I`m only losing money at the moment!
Sell and replace with what and where?
Cash & Bonds loses capital (AT earnings do not beat inflation). Equity markets tumultuous.
SA property fundamentals are strong and long term outstrips other asset classes.
Property capital growth with AT earnings does beat inflation.
If you are not making money in property, you are not invested in the correct locations or in the wrong end of the market. An example of a good location and market segment is East Rand residential R400k to R600k. Other market segments that are in demand include industrial & retail in major metropolises.
By all means, diversify offshore, however, choose the correct markets, mitigate your currency risk and most importantly, remain in real estate - long term mind-set a pre-requisite.
Have your portfolio assessed by a property professional and realign it to the market.
Unfortunately the answer is not as simple as it is given above. Having been in the financial advisory business for a long time I do not trust a financial advisor that gives "advice" this easily. It is very complicated doing proper financial planning for anyone. Property is in my opinion definitely one of the best investments if it is managed properly and by experts in the field of rentals. I can give you examples of major property investors that are making their money. I can give you examples of clients following the advice of serious financial advisors not making money. I think it is time for investors to form an investment forum with the help of knowledgeable advisors in a variety of fields to help enabling everyone to make some serious money !
Never ask a financial planner about property. Go to a property expert. And for your bennefit ask both of them then make a decisioin your self. lastly there aint such a thing as good/bad invesment but a good/bad investor...there are a lot of opinions with different experiences out there. remember that....goodluck
As a financial planner it is important to remain objective and highlight the risk factors associated in repsect to the respect asset class. Today there is adequate insight provided by experts in their respective fields.
Over the long term creating wealth through accumulating capital through capital appreciation and income (reinvested) for an investor looking to build capital through a combination of listed and unlisted companies that have a good management track record and sound economic characteristics through prudent investments principles within an intelligent framework is key to wealth creation.
A financial planner should be equipped to provide a broad overview on the respective investment vehicles i.e. property however should a client pursue this avenue, then the financial advisor could refer his client to a property expert.
As professionals we should not discredit each others professions but rather work together in bringing investment solutions to investors to meet their specific needs.
For the consumers of investment products, I manage capital and income through regulated investment products together with investment professionals based on a financial needs assessment to determine what the target real returns are for my client and then construct a portfolio of asset classes both locally and globally. As a team we have managed to meet our clients needs succesfully from pre retirement into retirement.
A lot of good points from all above contributors. However ask yourself this question - isn't it true that the majority of people don't have the cash to buy a property and most of them would not qualify for another bond to buy a second property? How much property can one buy for R1 000 or R2 000 per month? If this is true, what better way to start retirement saving, preferably in our 20s, utilizing an RA. No GST or Income Tax during the investment term, protected from creditors and tax-deductible in terms of s 11(n) of the Income Tax Act. Plus a wide choice of portfolios and Unit trusts, including PUTs (Property Unit Trusts)for tose that "believe" in property as the best investment. No hassles with tenants, rates and taxes, maintenance,theft or fire,vandalism, midnight flits - you name it. Where can one make an investment in any or all asset class sectors at a discount of between 18% and 40%.If there is one please let me know.
No leverage in RAs, PUTs.
Actual Property Eg:
Investment Property Purchase 2002: R500k:
Bond: R350k(20yrs, Average 9% interest);
Starting Rent: R4000pm;
Rent Escalation: 7%p.a.;
Rental (after expenses) paid off bond in 9 years;
Current Property Value R 1.3m;
Current Net Rental R 77.3k p.a.
CapGrowth ROE 48% p.a. +
Current Annual Net Rental Return 51% p.a. on initial R150k equity invested.
Now multiply that by 11 properties on more or less the same parameters and you are comfortably retired in less than 10 years; 15 years at the utmost.
The same story from the property naysayers of today were being spewed across the market at the date of acquisition; yet the returns have been made and continue to escalate.
A unit trust will not burn down, does not need insurances, hassle of tenants, up keep, late rental payment, does not need grass to be cut, does not have rates and taxes . . . . and MANY more!
You cannot sell your front door off your investment property to maybe fund a holiday or wedding!
The property market DID do well in the past, you cannot drive your car by looking in your rear view mirror.
And what about diversification?
My equity portfolio is running at about 12%+ pa way better than property and with the new stealth taxes coming property is going to struggle for a long time. I don't have to worry about rates and taxes, increase in electricity, armed response, crime, repairs and maintenance, tenants etc, married in community nonsense
Remember, in Germany most people rent!! Why do we always get told property is the only way forward? I tell you why! Because the banks, estate agents (who are capped in Australia at 5%), municipalities score from all of the taxes and charges. When you subtracts you rates and taxes and all of your repairs over a number of decades will it look so rosy mathematically?
Theres a property fund that will give you good returns, the security of bricks and mortar, and you can disinvest within a matter of hours. The portfolio is worth R17Billion, has a stable history, good fund managers,no estate agents,no speculators, no interest rate issues and has shown better year on year gain in the last 5 years than your direct property investments, if you apply the true & correct calculation. People did go property gaga as if it was a monoply game, most investors were taking Financial advice from Estate Agents and shouldve paid for third party advice instead.Which would have prevented the liabilities and property value RESETTING which is what you see today. Your bank earns by selling debt,your estate agent in not an investment specialist. Fools and their money were parted, or rather enslaved by debt, money deflates, if you measure gold it hasnt increased in weight,everything else is derivative based(maths formula for greed & gambling with no tangability). Now youre trying to sell at a profit which will not happen. South Africa has seen an 80+ % drop in estate agents,bond originators and property related industires.But a converse in debt counsellors and most of our economically viable citzens will default (8.9million people). So chat you your financial adviser,investment adviser,stock broker or FSB approved broker who can add CIS,GIP,etc to your portfolio,give yu sound advice, and instruct you to budget n save and not live above your means like the prior.
YA what a bore,
I heard the best sense in 2011. Building a granny flat on existing property is the best option for both rental and expenses on mortgage. So dont retire yet as everyone is living longer.
So interesting that Heather does NOT answer the question! Nowhere did the reader suggest that he will EVER sell the property. He wants to live off the rental income. My advice would be to look for a property investment that will offer a RVR (Rent-to-Value-Ratio) of more than 0.6 - which will give you a positive cash-flow within a short period of time.