The Money Whisperer

Author: Magnus Heystek*|

10 July 2013 10:44

Why buying-to-let in retirement is a bad idea

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Negotiating sheriff auctions and the drawbacks of the BTL market.

Many investors approaching retirement still consider buying one or two residential rental units as an additional, sometimes primary, source of income. The basis for this decision is often an emotional one, rather than a mathematical one.

No matter how hard you try to convince investors about the foolish nature of such an act, the more determined they are to become buy-to-let (BLT) landlords during their retirement. Any advice to the contrary is viewed with supreme suspicion.

More than 20 years ago I found myself embroiled in a fairly heated debate on Radio 702 where I used to host the programme Financially Speaking, an investments call-in show. I commented on the dangers about buying flats in Hillbrow and Berea, two now notorious suburbs in Johannesburg, as an investment to fund a retirement. This was in response to a question on whether such an investment was recommended.

I expressed the view that the issue of demographic change in these, and other suburbs, could not be ignored, considering the long-term nature of such an investment as well as the illiquid nature thereof.

Boy, did that cause a firestorm on the airwaves and I was accused of being all kind of things, including being stupid, ignorant and a racist.

Twenty year on, I doubt if any of those investors - urged on by those advocating the “revival of the city centre”- have been happy with their investments since then.

In fact, property values in these areas have probably dropped by anything up to 90% - assuming buyers could be found, as there is no real formal market to speak of. The banks have long ago stopped providing finance to many similar areas – following the principle of “redlining” - and any transacting is more likely to be on cash basis.

It’s very hard to find statistics for red-lined areas in SA, but I base my conclusion on the very large number of properties sold at sales in execution at sheriff’s auctions.

Sheriff auctions

In the old days you had to scour the classified pages of newspapers to find the minutely printed “Sales in Execution”- notices. That’s what the law required - one advertisement to alert potential creditors that your house is being sold without a reserve price.

For sharp-eyed property speculators, going to these auctions that took place outside the magistrate’s offices used to be a fairly lucrative activity. I myself partook in many such auctions, often buying at well-below market value and then selling before the transfer took place.

But alas, that loophole has long since been closed down by Sars and for the last fifteen years or so you have had to take transfer of any property before it could be on-sold.

The world of sheriff auctions has also come a long way; there’s now a website, with subscribers alerted to auctions in any part of SA well in advance. With the help of Google Maps you can have a thorough look at all properties going on auction.

However, you still have trouble getting into a house or property that you fancy, with the sheriffs not usually in a position to help and you buy the property voetstoots, with no guarantees regarding its state. Normally the attorneys acting for the creditor bank demand full payment of the purchase price within 30 days. Once you’ve paid your 15%deposit at these auctions you must come up with rest fairly quickly.

The website reveals that thousands of repossessed properties are being sold every month at sheriff auctions across SA - a great deal of them in Hillbrow, Berea, Sunnyside in Pretoria and other areas which have experienced demographic implosion over the last 20 years or so.

I often attend these auctions in the hope of finding bargains in other areas, and as such can say that repossessed properties in these areas are virtually worthless. Speculators are buying them up at a fraction of the outstanding bond values—those with bonds on them—and usually simply pay the arrear rates and taxes and take on the responsibility of getting tenants or owners out of the building.

BTL drawbacks

Anyone who built a retirement plan on a couple of rented properties in certain areas 20 or even ten years ago must now be financially devastated. Both their capital and income are declining but they are still obliged to pay rates and taxes and in some cases maintenance of the property.

Therefore any inducement to enter the BTL market in the local context needs to take several issues into consideration. Do not be convinced that BTL is such an easy road to riches in your retirement.

The drawbacks include:

1. Lack of liquidity. You own a specific property in a specific part of a town/city and you have no idea what the area would look like in ten, 15 or 20 years’ time. You cannot sell half, or a tenth of the property in case of emergency. You either sell the whole property or you don’t.

2. The entry and exit costs to property are very high. These include transfer fees when you buy, estate agents’ commission when you sell and maintenance, electricity and water costs in between if your tenant doesn’t pay. Everyone is making money off your capital and you are left with all the problems.

3. No diversification. Your property is in one particular area which increases your risk.

4. Non-paying tenants. It takes six to nine months via an expensive court process to have them evicted; even then your property owner rights are severally curtailed.

5. Demographic changes over which you have no control. Many smaller, formerly prosperous towns in the SA platteland, have literally become ghost towns as a result of many factors including the decline of the mining industry, shrinking rate-paying populations and younger people moving to the larger cities.

6. Dysfunctional municipalities. The role of effective municipal management as an underpin to your property values can never be over-estimated. I rate this factor as most probably the single-largest threat to long-term property values in SA. As towns and cities implode you can be certain that your property values are imploding alongside.

7. The property marketing industry in SA is very effective and incredibly powerful. Many newspapers are wholly dependent on advertising by estate agents. You will battle to find any negative news on the residential property market in these publications. In a previous career I was the editor of a financial supplement in one of these papers. It was a fireable offence to write anything negative about estate agents. To this day nothing has changed and you won’t see anything that could jeopardise the mountain of advertising by the property industry.

8. Low returns. I often calculate the net returns of rental properties for clients, and am not surprised when the returns are well below 4% per annum, when all the costs and unforeseen expenses are included. This only leaves potential capital growth to make up for this poor investment.

My advice to investors is to approach any potential property investment - especially in the rapidly changing local market - with a great deal of circumspection. Be especially aware of claims that ‘in the long run property is a great investment’, or ‘God doesn’t create any more land’. These kinds of statements all play on the ignorance of naïve investors. Don’t be one of them.

*Magnus Heystek is a director at Brenthurst Wealth. Email him on magnus@brenthurstwealth.co.za with ideas and suggestions.

Topics: Magnus Heystek, investment insights, property, buy-to-let, BLT, retirement, Brenthurst Wealth, Hillbrow, Berea, Sunnyside, retirement investing



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