MyMoney Online, Business Wrap

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

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.

Subscribe to our Business Wrap Newsletter


702 welcomes all comments that are constructive, contribute to discussions in a meaningful manner and take stories forward.

However, we will NOT condone the following:

  • Racism (including offensive comments based on ethnicity and nationality)
  • Sexism
  • Homophobia
  • Religious intolerance
  • Cyber bullying
  • Hate speech
  • Derogatory language
  • Comments inciting violence.

We ask that your comments remain relevant to the articles they appear on and do not include general banter or conversation as this dilutes the effectiveness of the comments section.

We strive to make the 702 community a safe and welcoming space for all.

702 reserves the right to: 1) remove any comments that do not follow the above guidelines; and, 2) ban users who repeatedly infringe the rules.

Should you find any comments upsetting or offensive you can also flag them and we will assess it against our guidelines.

702 is constantly reviewing its comments policy in order to create an environment conducive to constructive conversations.

Read More
Outlook for residential property in 2015

Outlook for residential property in 2015

Bruce Whitfield's panel discussion examining the state of residential property in SA turned up some interesting findings!

How to invest in multiple properties (even if you can’t get a home loan)

How to invest in multiple properties (even if you can’t get a home loan)

You don’t need much money (or a home loan) to invest in multiple properties. Enter “Property Unit Trusts”…

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

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

It may come as a shock (but it’s all there in the small print); medical schemes do not fully cover you when you’re hospitalised.

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

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

Savers rejoice! On 1 March 2015 government introduces tax free savings accounts. Financial planner Claude Hannah explains…

How much you should save for retirement

How much you should save for retirement

You know you should save for retirement, but do you know how much? Financial planner Claude Hannah breaks it down in simple terms.

How to protect your wealth when the JSE is falling

How to protect your wealth when the JSE is falling

How to protect your wealth should the JSE start to weaken...

How to create a new, 12-million strong capitalist class with the stroke of a pen

How to create a new, 12-million strong capitalist class with the stroke of a pen

Leslie Sedibe says govt can create 12m land owners “with a stroke of a pen” by giving title deeds to shack dwellers.

4 beliefs about shares that keep you from growing wealthy

4 beliefs about shares that keep you from growing wealthy

4 popular, yet patently false, beliefs about stock market investing that's holding you back.

Popular articles
Dr Mbuyiseni Ndlozi opens up about his thesis

Dr Mbuyiseni Ndlozi opens up about his thesis

Ndlozi explains the significance of the the first chapter of his thesis: 'Trauma in the archives'.

German prosecutors probing Steinhoff CEO Markus Jooste (for accounting fraud)

German prosecutors probing Steinhoff CEO Markus Jooste (for accounting fraud)

The Money Show’s Bruce Whitfield interviews Steinhoff International Chairperson Christo Wiese.

So what exactly is radical economic transformation?

So what exactly is radical economic transformation?

Wits associate professor of economics Christopher Malikane speaks to Azania Mosaka about the term that is being bandied about.

Is it normal to have a curved penis? Dr Shingai explains

Is it normal to have a curved penis? Dr Shingai explains

Urologist Dr Shingai Mutambirwa says penile curvature is only a concern if it impedes a man's ability to have penetrative sex.

Who is Advocate Tembeka Ngcukaitobi?

Who is Advocate Tembeka Ngcukaitobi?

The EFF lawyer stole the show during the state capture report court battle.

3 easy questions could bag you R2000!

3 easy questions could bag you R2000!

WIN R2000! But only if you can prove you're a whiz of the MTN Biz Quiz by answering the following three questions...

Blesserfinder: Matching you with a sugar daddy near you

Blesserfinder: Matching you with a sugar daddy near you

Is social trend Blesserfinder, where girls are allegedly matching up with rich 'benefactors' in exchange for sex, a real thing?