Property Now More Appealing for Investors

South Africans are bad savers.  That’s a known fact.  There is very little done to plan for retirement so that your standard of living is maintained.  This places huge stress on you when you get older – something you could happily do without.

There are a number of investment options that all have their advantages – some of them with significant tax benefits.  But I’d like to focus on property investment and why it’s now more attractive than ever.c37363fce411528f_shutterstock_192493574.xxxlarge_2x

I’ll assume that you own your own property.  If not, then before you consider any other investment – purchase your own home.  It’s forced savings.  You’re not paying off anyone else’s bond.  And you will have an asset to trade later.

If you have some cash, what can you do with it?  Investing in stocks and shares is one option.  It’s high risk. And when the global markets get jittery you can lose a massive chunk of your investment value overnight.

Invest in a fixed deposit or money market account at your bank.  It’s low risk.  But the returns are minimal with the current low interest rates and your investment will barely keep place with inflation.

Then there’s property.  If you purchase smaller properties to rent out your gross rental returns can be anything from 9 – 12% in the Cape Town Metro.  With the high rental remand this is escalating by about 10% annually.  You need to factor in your costs such as rental management fees, rates and taxes, levies, and maintenance.  You will need to fund part of your purchase and could be paying interest on this in the region of Prime. But in many cases you will still enjoy a net annual return of 8 – 10% on your cash investment in your property.  That’s more than you get on your cash in the bank.

However, there is one very significant difference when it comes to property investment over other investments.  In addition to your rental return, you also benefit from the capital growth of your property.  Here’s the sweetener:  You get the benefit of the capital growth on the entire property, including the portion you have purchased using the banks’ money. HappyCouple

So, let’s assume you bought a flat for R500 000 and financed R 450 000 of it.  If the property escalates at 10% per annum (very realistic at present), then it’s worth R 550 000 after a year.  Your R 50 000 cash investment into the property has now grown by an additional R 50 000.   Your rental income should just about cover all your expenses, although in certain markets you may initially have to top up the shortfall.

If you shop wisely you can acquire a property where the monthly rental will, within a few years at most (and possibly less), cover your monthly expenses.  Your rental income increases annually.  Your debt reduces as you pay off your bond.  And you benefit from the capital growth on the entire asset from Day 1, having used borrowed funds.  Genius.

Steve Caradoc-Davies

Principal of Harcourts Platinum
Director of Harcourts South Africa

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