DOWN side UP!

Following on from our September newsletter, which focused on the concept of property investment, we now look at a few of its pros and cons. These should be weighed up carefully, before a potential investor takes the leap…

Pros

A thriving property portfolio will increase an individual’s net worth and income. This income could be used to partly or fully cover the bond of the property and pay expenses.

Owners can claim for expenses incurred against a property, when they file their annual tax return with the South African Revenue Services. SARS allows tax deductions against, for example: bank charges; interest on a bond; repairs in respect of the area let; security and levies; rates and taxes; homeowners’ insurance (although not for household contents); advertisements; garden services; and the fees/commission of the managing agent.

Borrowing for investment is called gearing, which is one of property’s biggest benefits. It is the ratio between your debt and capital, and allows you to put the bank’s money to work for you – giving you access to an asset worth far more than you could have afforded on your own. Note: gearing magnifies your returns, but it could also magnify any losses should market conditions turn against you.

Those who like to be in control of their investments may find themselves investing in property. You have direct line of sight of a property, and so can see how it appears to others and how the area in which it is based works in its favour (or otherwise). You are able to make choices according to what you see – such as sell or wait, upgrade or leave as is, peg the rental or advertise for a higher-paying tenant – rather than having your destiny tied to something intangible, in the way of shares, boardroom negotiations to which you aren’t a party and/or the nervous decisions of corporate CEOs.

The returns on a sound property investment will tend to keep track with inflation, especially if you’ve done your homework when purchasing the property (market analysis, location, rental demand etc.).

Each segment of the property market has its own dynamics, so it takes significant intelligence to invest successfully across them. Those who become niche experts can outperform the market if they buy wisely; they may ‘see’ bargains that others might not, which are made clearer through regular research, a detailed examination of market trends and economic projections, and even appropriate networking.

Cons

Of course, in an economic downturn or if decisions are made poorly or in haste, many disadvantages could come to the fore – including interest-rate fluctuations over which an owner unfortunately has no control.

Property is illiquid. Unlike other investments that can be traded, sold or converted into cash post-haste, property can’t be moved if an area goes downhill (e.g. a criminal element moves in) or changes significantly (e.g. your business no longer fits in there).

Property is management-intensive so ask yourself if you have the time to manage your portfolio, or whether you should hire someone to do this for you. Remember, an agent will take up to a 10 percent cut of any buy-to-let earnings; plus a month’s rental to find a tenant. As the owner, you will still need to devote time to managing the manager.

Additionally, owners are expected to fork out for maintenance. Owners will also need to budget for any improvements that will keep the investment appealing.

Unlike other investment sectors, there has been an historical shortage of detailed information on residential property investment. Fortunately, however, this situation is changing due to the work of companies like Lightstone Property. Their house price indices are based on globally accepted statistical principles, using data collated from official sources; these can be used in real estate deals to make sound investment decisions.

And then, of course, legislation favours tenants over residential owners. Should a tenant default on their rental and refuse to leave, an owner cannot simply change the locks. A relatively lengthy legal process must be followed, involving lawyers’ costs and lost income for the owner, before they will once again have possession of their investment so as to be able to fix it up for the next tenant.

As is evident from the above, there are many more aspects to consider in an investment made in property than may at first meet the eye, especially for a newbie to this sector.

Email Anton de Leeuw for Property Investment AdviceAt YDL, we take care of property investment for our clients. Call me today on 011 465 3756 or email anton@ydl.co.za to find a property investment solution that works for you.

Warm regards,
Anton de Leeuw