This seems to be the question on many minds and with interest rates at historic lows, we cannot blame investors for asking! As with most things, however, there is a short and a long answer.
The short answer – yes, the current tough economic environment and low-interest rates make for a buyers’ market with great investment opportunities but before you jump in, you need to ask yourself a few questions.
This article is not meant to give you the answers. Instead, we would like to point you to some of the things you should be considering before making the investment decision and as always, we recommend that you discuss this in more detail with your qualified financial advisor.
Below are a few things to think about:
- What are the additional costs, over and above the purchase price of the property?
- Do I need to finance these costs as well, incurring more interest, or do I have cash reserves set aside?
- What ongoing costs do I anticipate after the initial purchase?
- Should I buy residential property or go for commercial?
- Am I capable of vetting potential tenants and efficiently collecting rental income; or
- Who will manage the rental property on my behalf; and
- At what cost?
- How will my investment affect my income tax, and do I need to consider any other taxes like CGT, estate duty, etc.?
- Will I be able to continue paying the bond premiums, rates and taxes, and maintenance costs, even if the property has no tenant in it for a period of say six months?
If you can breeze through this list without feeling a tinge of uncertainty, direct investment into property may just be for you. However, if these questions make your stomach flutter, you should probably consider accessing your property exposure in a different manner.
There are two broad types of property investors; those who like the concrete aspect of a brick and mortar investment and those who may recognise the role that a property investment will play in their overall portfolio, but they are not passionate “property people”. Luckily, there are opportunities both locally and offshore, for both types of investors.
The textbooks tell us that investors should diversify their portfolios across a variety of asset classes, the big four being cash, bonds, equities, and real estate. The first three are usually well represented in the average balanced unit trust, but property is often left out by fund managers due to its specialist nature. Luckily, it is now easier than ever to access the property investment of your choice.
If you like the idea of having an address for your property, but some aspects of the list above concern you, or perhaps just the thought of the admin of it all exhausts you, there are some fantastic brick and mortar investment opportunities available to you without having to own the whole building/home yourself. Historically, investors have unfortunately been exposed to quite a few property scams, giving the syndication model a bad reputation in South Africa, but the industry has come a very long way towards protecting investors.
Lately, you can find opportunities to invest in both local and offshore properties via well regulated, formal channels. A few of the benefits of this investment strategy are:
- Access to larger commercial properties that you may not have been able to buy directly due to the size of the transaction;
- Professional investment managers taking care of all the administration, legal requirements, ongoing taxes, etc; and
- The ability to spread your risk by investing smaller amounts into various projects, rather than owning one building exposed to a single tenant.
Don’t really feel like worrying about whether your tenant’s pitbull is digging holes throughout the garden or whether the company you are renting to is laundering money from the back room? Perhaps you should rather consider the less hands-on investment route of listed property.
There is a multitude of listed investment options available. These investments – often called real estate investment trusts or Reits– trade on a recognised stock exchange, with all the accompanying regulations that listed investment managers need to comply with.
Investing in listed property is a great way of getting exposure to a wide range of properties across the globe. You can choose from local options that invest in SA only, global Reits that have exposure to a worldwide diversified portfolio, or anything in between. Some investors pick regional specialists to make up a basket with global exposure. This may sound like a lot of work, but you can access a local listed property fund with as little as R200 per month. Depending on your investment provider, offshore investments will have minimums of around $500 or another currency equivalent.
Apart from getting access to a global portfolio, your listed property investment will also give you exposure to a range of different types of buildings, which means you have a lower risk. Think about it: in the midst of the current pandemic the owner of a cinema building is probably having serious discussions with his tenant about staying up to date with the rent, but the owner of a building let to a low-cost supermarket has a secure income stream. Listed property investment will give you access to a large, mixed basket of types of buildings removing this single-tenant risk.
Whether you prefer do-it-yourself direct investment, property syndications or listed real estate, it is well worth your time to discuss the pros and cons with your financial advisor!