Jonathan asks: After reading some Kiyosaki books I am tempted to get into “buy to let” properties, so I can generate passive income later in my life.
What would you recommend if you were in my situation? Would you buy a house, buy an apartment to rent out (while staying in the current rented home), or would you say I should just keep investing in ETFs?
Maya replies: This is the second part of a question posted (see To rent or buy? That is the question).
If you are deciding between buying your own home or rather investing in a “buy to let” property you need to sit down and do your calculations carefully.
As mentioned in the previous reply, your rental is very low at the moment but you need to assess the risk of the lease not being renewed. If you tie up your money in an investment property and are then in a situation where you have to pay a higher rent, you could be caught in a cash crunch.
Also remember that as long as you are renting, you are providing a passive income to someone else. Ideally in retirement one would want to live in a home that is fully paid off but have a portfolio of properties that are producing income.
Buy to let
Many people have been very successful in the property market, but there are also a lot of horror stories. You need to do your homework before investing — know how to manage tenants and be knowledgeable about the area you are buying in and the rental that you can charge. Don’t rely on the estate agent — they will always overinflate those figures.
Kiyosaki writes a lot about buying properties in foreclosure, but make sure you understand the South African rules around tenant rights. The banks are coming across a lot of problems where clients are buying a property that already has tenants in it — and they don’t want to move out. It’s obviously better to buy a vacant property, or have an agreement in terms of which the seller or tenants agree to vacate the property on a date that suits all the parties.
Also make sure you understand the tax implications because if your rental exceeds your mortgage repayment and running costs, tax will be applicable.
Also build in an interest-rate cushion. You would be buying at a low point in our interest rate cycle so you need to ensure you have the cash flow to absorb interest-rate increases.
Select your property
If you are investing in property you need to aim for an annual net yield equal to 8% of the value of your property. This means you would receive 8% a year after rates, taxes or levies.
On average property rentals are about 6% at the moment. However, the lower end of the market has higher yields as there tends to be more demand for rentals of about R3 000 to R4 000 per month. This means you should look at properties around R350 000 to R550 000.
When you are doing your calculations (including the current rental, mortgage repayments, running costs and rental escalations) you need to ensure that your rental is covering your costs within eight to nine years.
A good resource is P3 Properties investments, www.hope.co.za.
Property vs equities
Whether to invest in property or exchange traded funds (in other words equities) is both a financial and emotion decision. A diversified portfolio with both asset classes is ideal — in retirement your properties can provide you with a steady income, but your equity investments can be used for lump sum purchases or additional cash flow.
But what the percentages should be depends on your personality. Are you someone who really gets property — you want to be involved and see yourself building up a property portfolio that you manage? Or do you prefer just to have a debit order go off each month and have a fund manager or an index tracker take care of the rest?
For some people property feels like a safer investment (mostly because the price fluctuations are not as visible), for others the fact that it is not so liquid makes it more risky.
I suggest you sit down with a financial adviser or accountant and work out a financial plan that you can work towards. You don’t have to have all the investments today; you just need to start with a plan that you can build up towards over time.
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