A Moneyweb reader sent in the following question:
I have recently closed a contract to rent out my flat for two years; the lessee paying each year’s rent in a lump sum in January each year – R 84 000 per annum.
My plan is to cover all my living expenses with my currant salary, and to save/invest the rental income for the two- to four-year period during which the lessee’s are planning to rent my property, which will produce about R 330 000 over the four years.
The question now, is how to manage these funds appropriately? With the economy being so volatile, I have considered placing the rental income of each year into a flexi-fixed savings account or similar provided by say Capitec, FNB and so forth. Will this be a wise decision, seeing as they state returns of more than 8% in some instances/plans you can choose. Will this be less risky than shares? I don’t have a portfolio as of yet and started work in 2014. Should I rather look into investing in EFTs, etc?
NFB Director and Private Wealth Manager Stephen Katzenellenbogen answers:
A good tenant is a valuable asset in itself; I hope that over time you are a recipient of this.
As always with a question of this nature, there are a number of unknowns from the responder’s side. Some pivotal questions from me are:
- Is the term two years or four years?
- What do you intend doing with your accumulated funds in two/four years’ time?
If the investment term is short and you have a specific need for the funds when the lease ends, then our advice would be a cash type solution as you’ve suggested. You could make use of a bank product such as a call account, money market account or a fixed deposit. As you will probably have a little time, i.e. more than a year, you could look to a flexible income unit trust or enhanced income unit trust which should give you an enhanced return over cash when given 12 to 18 months. These types of funds can have nuances in their scope of investment and it’s important to look in to these. One of the most important considerations is the allowable and current duration of the fund.
The duration talks to the average term to maturity of the fixed income assets, such as bonds, where a higher duration will make the fund’s value more sensitive to interest rate movements. In a climate of political volatility, as we are currently experiencing in SA, you may expect to see some wild moves in bond yields, as we have seen with the firing of former Finance Minister Nhlanhla Nene and the question marks over the safety of the current Finance Minister Pravin Gordhan.
Changing tack, if your investment horizon extends beyond the two to four years you would be doing yourself a dis-service by being too conservative. We would agree that markets, economics and politics, both locally and internationally, have been exhibiting an above normal amount of uncertainty. Furthermore, most markets are trading at valuations above their long term averages i.e. are looking expensive.
The aforementioned status-quo should not deter investors altogether but rather steer them towards a more measured approach. You could phase your investment in or even just do a debit order until your funds are depleted. Hopefully you can carry on the debit order once your pot-of-money from your rental is exhausted. We suggest keeping your investment relatively simple to start where you could look at unit trusts or ETFs as an access points. Most ETFs in South Africa invest in shares – this may or may not be appropriate depending on your needs. The unit trust universe in South Africa offers a broader opportunity set than ETFs in terms of access to multi-asset class and multi-geographic solutions.