When evaluating your investment portfolio, where investing in property is a viable and popular option, it is still preferable to consider a blended approach when investing.
By matching your reasonable return requirements at the lowest level of risk, the opportunities are made easier by pooled products, such as collective investment schemes, which mix and match underlying investment choices targeting different levels of return and varying degrees of risk.
As an investment in property is both an interest-earning (as rent) and a capital-growth investment (an increase in the underlying value), property investments are still very popular, and they prove to be more than just buying your own home. The home you live in should firstly be considered a lifestyle choice, and second as an investment.
There are a variety of possible property investments you can investigate. A direct property investment, which includes residential, commercial, and industrial properties you buy and then rent to another party, is one of the most obvious choices one can make. However, regardless of whether the property is residential or commercial, some issues must be considered:
Since property values are all about position, e.g., proximity to schools, noise, and traffic, buying in the right area is cardinal. Make sure that the cost (interest and any future changes in interest rates) of the amount you borrow to fund the purchase, as well as the cost of managing the property, will be sufficiently covered by your rental income.
Take note of any possible tax issues. These include the advantages of being able to write off costs against rental income and the effect of capital gains tax (CGT) on the sale of the property. Investigate any possible construction issues like the design or structural problems before you purchase the property. You don’t want repairs to eat into your investment.
The risk of the loss of rental income because either you don’t have a tenant, or you have a tenant who doesn’t pay or misses deadlines, must be considered before you buy. Get as much information about your tenant(s) as possible. Investing in property comes with costs like taxes, commissions, and legal fees. Keep this in mind.
Should you consider investing in property syndications – where you join up with many other buyers to purchase a commercial or industrial property – a word of warning is necessary. Thousands of pensioners have lost billions of rands in recent years owing to imploding property syndications.
These risks include buildings that are in a poor condition, little tenant demand, excessively high costs caused by the sponsor’s profit levels and commission payments, and dubious holding structures, where you in fact have no ownership of the property.
Investing in property companies listed on stock exchanges like the JSE has enormous advantages over physical property investments, in that you can invest smaller amounts of capital with no hassles in managing the properties. Since you are exposed to a portfolio of properties, your risks are reduced with the added advantage of being able to access your investment quickly. This way, you have the potential to make both dividends and capital gains. Currently, there are two divisions for listed property.
- Real estate holding and development companies are mainly developers and do not have to declare any dividends.
- Real Estate Investment Trusts (Reits) have a big advantage for pensioners who require an income since Reits are required to have at least 75% of their taxable earnings available for distribution to investors as dividends. These trusts include property types like storage facilities and retail malls.
Another way to invest in property is via a property unit trust fund, which is a collective investment scheme, which invests in listed property companies, usually commercial and industrial buildings owned in the name of the life company.
As always, it is imperative you seek the advice of your trusted financial advisor and property expert to ensure a successful investment will generate an income for you during your well-deserved retirement.
A certified financial planner and a tax-qualified advisor will be your best help during this last stretch. To get a broad idea of everything you have to consider prior to retirement, have a look at our best-selling book, The Ultimate Guide to Retirement in South Africa, and visit www.retirementplanning.co.za.