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Why I sold my investment properties

Haters will say ‘told you so’.
The author has learnt why financial advisors are generally against the idea of buy-to-let 'investing'. Image: Shutterstock

First, the spoiler: it wasn’t because of the tenants.

I’m not even sure how I ended up with a small rental portfolio (one and a half properties).

The first purchase, with a friend, was entirely opportunistic. A complex and area we knew well and a sudden forced seller meant this was a real ‘no-brainer’. It helped that the property market had cooled off after overheating in the early 2000s. Obviously the plan was justified by the usual logic: the bank lends you the money, you have to only cover a small shortfall and once the bond is paid off, we can sit back and earn a monthly rental income.

The second property was my first house that I’d bought. I managed to pay off that bond in a ridiculously aggressive timeframe (read: Why I paid off my house 15 years early) and after deciding to upgrade to a larger house in a better area, I figured that sticking tenants into the already paid-off house would be a good idea.

Here the dream of a passive income was in full swing.

These were both roughly R1 million properties and over time, the theory went, these should appreciate nicely.

Both had stable tenants who paid on time and didn’t really cause any drama. This was part of the problem.

Tenants have rights … and bargaining power

Not only do tenants have more rights than landlords, when they’re good tenants they use this fact to their advantage. And while the current environment (anaemic economic growth) means annual rental escalations of anything close to 10% are a delusion (unlike in the boom years), good tenants are able to negotiate zero increases (or token, marginal ones).

Of course they’ll try their luck. Why would a smart landlord risk replacing good tenants with unknown ones for a few extra hundred rand a month?

If negotiations are a little more aggressive from the landlord’s side, it is possible that those same good tenants will pitch a compromise. “Sure, we’ll agree to an 8% increase, but here’s a list of things we want fixed/improved/changed in the house.”

Not only does this impact your yield, but the headache of actually managing this process (with contractors, painters and the like) just isn’t worth the effort. Been there, done that.

Modest or no rent escalation, together with sharp increases in property rates, utilities and (sectional title scheme) levies has created a situation where yields are collapsing.

In both properties, it became clear over time that net yields were closer to 5% than 10%. Levies (including unrecoverable utility costs) and property rates for both these townhouses were fast approaching the R3 000-a-month mark.

Suddenly, that R8 000 in rental income looks more like R5 000 a month.

Separately, the theory of ever-appreciating property prices has been blown to pieces. In real terms, property prices have been in decline for the last decade. This means that over time, that R1 million asset is depreciating in value.

The long-term tenant in the co-owned property decided to emigrate last year, forcing us to revisit this investment. We both decided that the hack of being landlords was no longer worth it, not to mention the drama of trying to find a new tenant (the ‘hidden cost’ of the additional 10% you give up to an agent for securing a tenant further impacts your return).

Read: How buy-to-let landlords are being squeezed

The risks have become untenable

Long term, the risks far outweigh any potential upside.

It is possible that we could have a return to the boom years (anything is possible), but it’s almost impossible to see how that happens. The increases in administered prices will not abate (something has to fund collapsing infrastructure), putting further pressure on yields. That the law favours tenants remains a risk, as does the continued uncertainty regarding property rights.

Plus, being overinvested in physical property is a problem.

Would it be smart to put the majority of your investment portfolio in one stock on one exchange? Or in one asset class? Why would you not diversify your risk? The lack of liquidity – properties take months to sell – is a further obvious issue.

None of this is new. Financial advisors, who are generally dead against the idea of buy-to-let ‘investing’, constantly warn about these and other risks.

Once we were rid of the co-investment, the decision to sell the other property became even easier. Those good tenants were given notice, some minor renovations were done once they vacated (more hidden costs that you don’t see when doing those yield calculations in Excel), and the house was put on the market. I accepted a signed offer to purchase the week we went into lockdown. Talk about timing!

With both properties, there was a modest ‘profit’, but not even enough to trigger capital gains tax. That hurt.

It’s tempting to try and convince myself that ‘at least I didn’t lose money’. But what about the opportunity missed in not investing that extra few thousand a month, which was funding the ‘shortfall’ on the bonded house, elsewhere? Even an exchange-traded fund tracking the MSCI World Index would’ve delivered nearly 14% a year over the last five years.

What a miserable thought.

Listen to Nompu Siziba’s interview with Ben Shaw, CEO of digital rental platform HouseMe (or read the transcript here):

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Great article. However if the same funds had been on the JSE in any nr of good mid and large caps over the past 5 years you would also have made nothing.

At the moment my vote is……sorry no good ideas except investment in my own business.

You do though hopefully have a nice lump sum now?

SA in general seems to be a bad idea.

The Satrix Div Plus. returned only around 2.5% per year over the last 10 years. Add the dividend and you are probably below inflation. These are supposed to be the top JSE stocks?

Rental property can work in countries where property rights are secure. SA is not one of those countries.

The environment currently is investor unfriendly. Main problems for me are:

– punitive rates and taxes with deteriorating infrastructure and service levels.
– increasing numbers of habitual levy defaulters being a burden on the body corporate. Poor legal environment.
– oversupply of rental units, empty office parks are being converted to residential units.
– poor performance by trustees and managing agents.
– poor economy.

Sold most of my investment properties last and earlier this year. All of which doubled in value since 2013 due to the Cape Town boom. I found them to be great investments but the party is over, so cashed out. I’m one of the lucky ones I guess

The combination of redistributive rates and taxes, a law that expropriates property in favour of tenants, the capital gains tax, the additional supply of forced sales due to estate duties and rising unemployment, the inefficiencies and criminality at Eskom, plus the effect of socialist ANC policies in general, are weighing heavily on assets values.

These socialist policies are an extra tax on capital formation. Previously, the investor did his calculations, and if the rental income could cover the bond, it was a no-brainer. Now, the anaemic rental income has to cover the bond, the redistributive rates and taxes, the cost of legal action against tenants, the cost of crime, plus the cost of all the various taxes on capital formation. The rental income must also compensate for the increased risk of the implosion of municipal services and the degradation of the neighbourhood. These “taxes” create a negative feedback loop of increasing supply and selling pressure, where investors become sellers locally and investors in golden-visas overseas. These local taxes support property values overseas and act as a subsidy for the property market in Malta and Portugal. The real value of the local property is forced lower to compensate for the additional risks, costs and taxes that come with socialist policies.

To compensate for the decline in the real value of properties, the bankrupt municipality has to raise the tax ratio to support the wage bill and to postpone the degradation of the neighbourhood and the implosion of service delivery. In this way, the negative feedback loop continues until, eventually, entire middle-class neighbourhoods have been “redistributed” by the municipality, and turned into squatter camps by the socialist policies.

There are huge incentives to live in squatter camps and huge penalties for living in middle-class neighbourhoods. Investors will emigrate to jurisdictions where they are rewarded with good incentives and will flee from jurisdictions where they are punished with taxes.

We sold our property portfolio last year purely due to the cANCer destruction of SA but we invested in the correct structures, used the correct professionals and knew how to leverage profitably, so cash flow & capital gain was beyond all local investment performances. CGT was marginal, but the estate planning structures ensured ZERO Tax commitment.

The capital went offshore and is currently performing at 43% per month, well beyond any legacy investment out there.

43% p/m – Pray tell what are you investing in????

DeFI…wild wild west of finance; high risk; not for the faint hearted.
(Note 75% of initial capital withdrawn into gold & silver…target 2 more months for 100% initial capital extraction).

We do thorough due diligence in this space and selection passes our critical stress test:

Just lookup these on coingecko with filter from 1 January 2020 (excludes yields from pooling & staking programs)

Aave; Algorand; Ampleforth; Band Protocol; Binance Coin; Chainlink; Compound; Darwinia Network; DOS Network; Elrond; Iota; IRISnet; Kava; Kyber Network; Loopring; Melon; OriginTrail; Parachute; Pluton; Ren; Reserve Rights; SwissBorg; Synthetix Network Token; TrustSwap; UniBright; Utrust; Xio; Zilliqa; Crypto.com Coin; Bitcoin; Ethereum.

Governments, The EU and Big Corp have become extremely active and entering the crypto sphere quite bullishly, so we expect further excessive growth long term.

For every person that I have met that made a profit trading crypto, I have met 10 people that regularly win at the horse races. They are all bankrupt though. Their amazing luck bankrupted them.

There is only one way to make 43% per month. That is by running the risk of losing 43% per month. Anybody that tells you otherwise is an amateurish imposter with a hidden agenda.

Except that we are not trading crypto. We do due diligence, buy and hold long term. Real teams, strong communities, real solutions to real world problems, destined for mass adoption; in the LONG TERM. We do stake, save & pool crypto to enhance our rewards, just as you would deposit fiat into a bank account for interest or buy stocks for dividends.

And yes, it is high risk as we mentioned above, hence well diversified; we have extracted 75% of initial capital into gold & silver and in 2 months, this will be 100% capital extracted. After that, everything remains in the black.

There is always risk when you try to invest “other people’s money” that they have already invested. If you buy a rental property using the bank’s money do not expect both the bank’s shareholders and you to make reasonable gains.

Invest your own money 100%, if it means you cannot afford property then do stocks.

I bought a small apartment R280 000 cash and I make R2 000 net every month. That’s a good return and I am happy. Properties in the R1m range are oversupplied and have gone down in value (5% to 8%) in Sandton, Greenstone areas in the past few years. You can’t say the same at the bottom of the market.

43% per month?! Not even El Chapo got that return…

Hi, Pls advise which offshore fund are you getting a 43% return.

Tx
Suran

Which professionals did you use?

We are members of an investment club that incorporates professional services: trust specialists, conveyancers, asset managers, rental insurers, security & financial planners.

It’s a closed group, so if you need specifics, you will need to reach out to us (do an internet search).

43% a month? – How is that even possible…. sounds like a “red flag” to me…. never seen returns anywhere close to that

Research the projects mentioned above…you could have done 100x if you handpicked a few winners and skipped some of the losers.

Sold just before prices started dropping.
Holiday town, enough bad rentals to make life painful.
Made very good money, but making slightly more now on private investments. able to spend all my time fishing now, wake up happy.

A well written article indeed. I sold my ‘investment’ property several years ago too. The levies, property taxes, and the continious maintenance put a huge pressure on my cashflow. The profit I made when selling did make up to a certain extent for this but the reality is that I just broke even after considering times between tenants when there were no income and the odd ones that left owing me money.

The biggest put off for me, as you rightly point out, is that tenants are an overprotected species in the eyes of the law. If it continues there will one day be a shortage of rental housing just like there is a shortage of job opportunities now due to the draconian labour laws.

Same boat here – just one more to go and I’m done with physical property. The municipal mess together with tenant risk highlighted here makes investment property a financial dead end for 80% of investors. You can still make money here, but the days of lazy returns are gone forever.

Can’t say I will follow suite.

In fact with the lowest lending interest rates we’ve seen in generations , people , including myself, are snapping up property despite the recession. Banks are offering 100% home loans, still and a discounted prime lending rate.

Sure, tenants have more rights and you can’t increase your rental, but you’ve got an asset that will invariably double in value over 10 years depending on location.

Bullish on South Africa.

It will double a currency like Zim $

Not sure I agree with your statement of “but you’ve got an asset that will invariably double in value over 10 years depending on location”.

Allow me to illustrate my point:

1) I own a rental property as well (location very good) and market price has been stagnant for at least the last 4 years.

2) My parents sold their house (also in a very good location) 2 years ago. Market value for their property was c. R1m less in 2018, than what it was in 2008 (they had done an appraisal / valuation on the same house in 2008 as well, as they would have sold back then). Therefore, massive value destruction in 10 years’ time.

3) Sure, interest rates are at all time lows – that means you can afford to take on more debt, now. 100% LTVs from banks sound very attractive. However, when interest rates go back up (not a question of if, but when), one has to be able to fork out extra cash to pay higher bond costs (read interest). Lots of first time property buyers taking on too much debt now, and buying properties which they technically cannot afford if the rates go back up again.

4) House prices are driven off market sentiment, economic drivers such as economic growth (GDP), job creation, stability of property rights (i.e no expropriation without compensation), rates and taxes and a willing buyer, willing seller dynamic, among other things.

5)
5.1) Firstly, SA’s GDP is not about to just magically grow, in real terms, >5% for the next 10 years – we can, but we have a government which does not allow for such market conditions as a result of corruption and restrictive business policies.

5.2) Unemployment at all time highs in SA – we are at a c. 40% expanded definition of unemployment – that means every 2 out of 5 people in SA does not have a job – Covid 19 has had a massive impact on more job losses, and money that had to be used to help struggling businesses, are either misappropriated or ends up in the wrong hands. If we have a majority of unemployed people in SA, GDP going backwards and inflation eventually rising (and interest rates), housing prices will struggle, and potentially take much, much longer to double in value.

5.3) CPI in the last month increased, as a result of (you guessed it) higher taxes. Increasing rates and taxes on properties, eventual increasing interest rates and declining free cash flows / disposable income for consumers, will make it tough on people to buy / maintain properties. Having a negative impact on market sentiment and house prices.

5.4) Lots of people are emigrating (just look at the directors’ comments from Curro and AdvTech to get an indication). This, in many instances, translate to property prices taking strain, as owners end up taking massive discounts to “market value” in an effort to liquidate their properties as quickly as possible. If SA does not get its act together, this market phenomenon can last for much longer.

6) Let’s say property prices do in fact increase – and double in value in 10 years – that is a CAGR (rule of thumb) of c. 7.2% p/a. Questions you have to ask yourself in this instance are:

6.1) Would I be cash flow positive after 10 years on the bond (taking into account rates and taxes, perhaps levies, vacancies of properties, maintenance, possible escalation or reversions of annual rent etc). If not, that means you technically had to “pay in” every year so far. Sure, you have doubled your initial capital value, but say you want to sell that property now, you have to pay agent fees and capital gains (assuming you held this as investment property and not your main residence). Yield on this thing is now definitely less than 7.2% p/a, taking all the above into account.

6.2) For all this trouble, is it not easier to rather put my money into an S&P500 ETF, or even a savings account earning more than 7% p/a, than having to deal with tenants, agents, sars, banks, property management companies, maintenance etc etc? (therefore saving yourself a lot of effort)

In conclusion:

There is always room for buy-to-let investment diversification, but all risks need to be looked at on a holistic view. To assume that property prices will just double in value over a ten year period, is very naive and could potentially be very dilutive to your own finances (and very high opportunity costs). Given SA’s current situation, I would definitely not assume market values would simply double in value in 10 years’ time.

That’s just my 2 cents.

Excellent comment. I would love it if property investors made a killing over the next ten years because that would imply that SA has averted a financial catastrophe. At the moment we are clearly still heading for the cliff, seeing that a crime syndicate is in control of the government and the Debt/GDP and fiscal deficit are ballooning out of control.

Economic policy is the fundamental driver of investment returns in a country. A property investor in SA has a de facto geared long position on Luthuli House. Now, I believe it is safer to be invested in Pollsmoor Prison because there the criminals are exactly where they should be. The decline in the inflation-adjusted returns over the last 2 decades is the “margin call” for being long Luthuli house.

My first comment. Yes, property risky. For sure. I see however huge opportunity in the R200k to R500k housing. That is where most people can afford. Volumes higher as well. Buy house for R200k, little paint, sell for R300k. Big opportunity here which most middle class people are missing because it’s “beneath” them or they see it as too risky. Second opportunity is the ability to have some personal income tax reduction. For salary earners, this is normally a difficult exercise. The normal vehicles of pension fund and or travel allowance not a nice short term incentive. Expenses on rental property makes it little bit more worth while and you can then make a good business of it using your tax money to upgrade your low end house, sell it and start again. So depends probably on how hard you are willing to work. Lazy people don’t make money. Lazy smart people maybe. Most of the rest of us, we must hustle.

In the US seeing cash flow positive properties and these low fixed rates are creating another boom. Here Im worried the municipality earns the return instead of me.

For property rentals, consider the Tax admin, provisional tax and audits.
The investor risks his money to buy a rental property, does all the work and govt shares by investing nothing and doing no work.
I was put off by the previous Govt. admin corruption and sold my rental property.

Meanwhile a small property purchase in The South of a France 8 yrs ago for €180K at roe of €1=R9 is now worth €250k at roe €1=R19 with rental income covering costs and taxes! You can still invest Rands into properties offshore and expect a long term return if you choose the right place….and you can stay free on your holidays ….and have a bolt hole overseas if the sh.. hits the fan here! LOL!

Not just investment properties are a nightmare with local municipalities, my own roof over my head gives me a headache. The Great Kei Municipality should be closed and never opened again, there is a collection of illiterate, mathematical accounting morons there that are in a class of their own.

Their monthly accounts if you get them are 3 months behind, completely wrong, not reconciled, strange amounts credited to them and the system charges interest regardless of early, on time or non payment. There is an interest charge even with a credit balance.

These are the clowns collecting for no services and then reporting to the council on the finance available to to run the municipality.

Thank you Hilton for a well worded, easy to understand article and for been so vulnerable

thank you for the article – the best piece of advice i took from the article was regarding the long-term tenant in the co-owned property (who) decided to emigrate last year. my advice would be … to do the same

This is a daft article. A Moneyweb journalist bought some poor investment properties so decides to try and paint all investment property as poor? Just because you bought shares in Steinhoff ten years ago and not Naspers doesn’t mean one shouldn’t invest in shares

That’s exactly what it means…don’t invest in shares. In the share market, yes, in individual shares, in a poorly diversified portfolio, no.

Another example of divestment by individuals out of the South African economy. Exactly the same argument can be made for starting and running a business in South Africa.

Hello….is this Magnus Heystek writing under pseudonym ???

Jokes aside, strange how all those detractors of Heystek, and many others like me that shared these very same views and predicted this got lambasted on the forums over the years.

LoL, where are all those detractors now !?

Investors tend to ignore liquidity factors, and all the associated true costs inherent in a physical property investment… Whilst property can be a useful diversifier – as always what percentage of ones total wealth is exposed – and is this sensible? My South African clients who have diversified with us offshore into a properly diversified actively managed portfolio on a 3 – 5 year basis have earned as at end August – net of fees & in USD for example here – between 4.32% and 10.59% depending on their risk profile – whilst maintaining daily liquidity and no penalties or other costs if they need their funds fully or partially returned for any reason.. Speak to a truly independent & regulated local advisor about offshore diversification through an independent and locally regulated asset manager

One should also measure your return against the actual amount invested and not the market value of the property. It is possible to get your initial investment back from profits or from increasing the bond on a sustainable basis.On this basis investment in property can become a very lucrative business over a longer period of time.The tenant provide a big part of the risk factor but if you can do it as an owner/tenant then you can acquire a prime property with a very little investment over time.

In the last 17 years SA Listed Property has been the top performing sector 6 times and second best 4 times.

Maybe time to look at these?

I have many 8% net yield residential properties for sale. Been at it for 10 years but also cashing in. Luckily first time buyers are plentiful the investors dissapeared

Couldnt agree mkre. I learnt this after buyimg a property at 25. It is not worth it! The levies, rates etc just eat up the whe rent and growth is non existent. I only only where i stay because i have a fixed bond rate and dont have to keep paying escalating rent.

You see it all the time, people sell their shares when they do not perform, and then buy the best performers, only to complain that you cannot make money from shares when those star performers go down too. Stick to your strategy and do not put all your eggs into the same basket. If you try to juggle the eggs some of them will fall.

Property is a long term investment, in times where the economy has “negative growth” you should expect it to struggle too. The silver lining is that it should keep pace with inflation over the long term and preserve the buying power. Times like these you should take spare cash and invest into evacuated solar tubes or a heat pump to hopefully halve your electricity bill. Invest in a gas stove so that you can continue cooking when the power is out.

Power is not going to get cheaper, so invest your money in technology that will offset the cost, and redirect the cash that would normally go to Eskom into assets that will have value long-term.
Should inflation rise due to the currency that is extremely and severely undervalued then the choice to sell would have been a decision that could easily loose more more buying power in the process. Having 0% growth is still way better than losing 50% due to inflation.

Investments are not all about making money, sometimes preserving buying power is a good investment too

CGT will still be triggered – even on a small profit.

End of comments.

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