Can’t (or won’t) buy to let? Don’t sweat; there’s a far more lucrative option

Financial planner Claude Hannah compares the costs, risks and returns of property unit trusts to that of buy-to-let properties.

For this article to make sense, consider first reading the following related piece:

- How to invest in multiple properties even if you don’t have much money and can’t get a home loan

Financial planner Claude Hannah compares the costs, risks and returns of open ended property unit trusts to those of buy-to-let residential properties…

Costs

Comparing the Total Expense Ratios (all costs excluding advice fees) of some of the more well-known funds, it is clear that initial charges are generally less than 1.5 percent. Advice fees, although costly in some instances, can be negotiated with the financial advisor.

When buying a new property, the initial fees that are made up of transfer fees and bond fees can easily exceed five percent.

(Click here for a calculator that’ll help you determine the breakup of these costs.)

There are also costs associated with owing a property such as rates and levies, maintenance, home owners insurance, etc. Rising interest rates can also affect monthly repayments.

Risks

The main risk of investing in a property unit trust is that the value of each unit held by the investor decreases in value.

The investor will suffer a loss if she sells her units for less than she bought them. Typically, the property market is less volatile than equities and losses can be avoided by not selling units during poor market conditions.

(Click here to learn more about how to protect your wealth when the market is falling.)

Bad tenants can reduce the return on investment in property by causing damage or through an inability to pay rent. When tenants move out, there is also the risk of the property being empty for extended periods of time.

Returns

Over the last ten years, listed property has shown an annualised return over 20 percent and in 2014 it outperformed equities. In 2012, investors enjoyed exceptional returns of between 35 percent and 40 percent. This is, however, not an indication of future growth.

When looking at physical property, we need to look at capital growth as well as rental income. Since 1966 average annual house price growth after inflation has been 0.9 percent. Rental income is very dependent on location and, while returns in some areas are excellent, they can be very poor in others.

Liquidity

Liquidity refers to an investor’s ability to “cash in their chips”. If an opportunity presents itself, an investor can sell units immediately and use the proceeds to invest elsewhere. When selling a property, on the other hand, it can take months to find a buyer at the right price.

Conclusion

Property unit trusts can form a valuable part of your portfolio, especially for young investors who can’t afford a bond repayment. It is often overlooked and should be considered as an alternative to direct property investment.

Also read the following articles by Claude Hannah:

- How much you should save for retirement

- Savers rejoice! South Africa gets tax-free savings accounts on 1 March 2015

- Why medical aid is woefully inadequate (and how affordable gap cover helps)

- It costs peanuts to insure your most valuable asset

Claude Hannah is a financial planner for Venn-Sure Consulting. He completed a degree in Financial Risk Management from the University of Stellenbosch in 2006 as well as a post graduate diploma in Financial Planning. Claude helps to organise and simplify the often complicated and busy financial lives of his clients. He takes great pride in providing the highest level of service to help his clients build and protect their wealth.

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