Property is one of several asset classes, the others being equity (shares or unit trusts), cash-related products (like money market products), and bonds.
Here are some of the most important benefits of investing in property:
- It can provide a passive income that requires relatively limited involvement on your part. What’s more, you can generate a stable income as the rent is usually consistent and increases with inflation yearly.
- There are also tax advantages in that you can deduct the interest portion of the mortgage, the rates and taxes, and all maintenance expenses against the rental income.
- Property investment diversifies your investment portfolio, reducing its risk and volatility
What are the downsides?
Property investment also involves risks and challenges, such as finding suitable tenants, dealing with maintenance issues, and facing market fluctuations. When things go wrong, they can go very wrong…
More than one way to skin a cat
But there’s more to investing in property than residential homes. The other forms of property include:
- Commercial properties such as shops and offices. They can generate income, but they also involve higher costs and risk. Commercial properties can be harder to finance than residential properties.
- Industrial property used for manufacturing, storing, and logistic centres (an increasingly big deal as the world embraces online shopping).
- REITS (Real Estate Investment Trusts) offer shares of a company that owns and operates properties. REITS are traded on the stock exchange and pay dividends to shareholders. They can generate income from rent, interest and capital appreciation but expose investors to market fluctuations.
- Property unit trusts are collective investment schemes that primarily invest in listed property companies that develop and manage real estate. They can be traded on stock exchanges (listed) or not (unlisted). Property unit trusts are usually diversified across multiple sectors and geographical locations. Investors receive returns from the performance of the underlying property companies. Units in property trusts may be less liquid than REITs.
Home sweet home
Another important question is: Should you regard your residential home as part of your investment portfolio?
Some people consider their home an asset because they expect it to appreciate in value over time, especially if they make improvements or renovations. They may also use the equity in their home to borrow money for other investments.
However, owning a home also includes expenses, such as mortgage payments, rates, insurance, maintenance, and repairs. These costs may outweigh the potential income, especially if interest rates rise.
Other people regard their home as a lifestyle asset – like a holiday house or yacht. They value their home for its comfort and happy memories with family and friends.
There is no right or wrong answer to this question. The important thing is to be aware of the pros and cons of owning a home and to discuss the purchase with your financial advisors.
But isn’t South Africa a special case?
Investing in property in our rainbow nation is an intricate issue that depends on many factors, including:
- The property market is still recovering from the impact of the Covid-19 pandemic.
- The property market is also facing adverse gales from the rising interest rates, which have increased the cost of borrowing and reduced buyers’ affordability. The prime interest rate has risen from 7% in October 2021 to 11.25% today, reducing the demand for property, and thus prices.
- The economic outlook for South Africa is also uncertain, as the country struggles with little growth, high unemployment, rising inflation, and frequent load-shedding. These factors affect decision-making and are likely to reduce the demand for property.
The world is your oyster
Investing in property in South Africa now may not be a good idea for everyone. It is probably more suitable for investors with a long-term horizon, a diversified portfolio, and a good understanding of the local market conditions.
The good news is that, in today’s globalised economy, it’s relatively easy to invest in offshore property through REITS and property unit trusts, both of which can include investments in commercial and industrial property.
It goes without saying that you should contact your financial advisor before investing in property.