Dominique Bowen
The investment landscape is abundant in the variety of opportunities it offers investors to both preserve and grow their wealth. With that choice comes the importance of a carefully considered decision about which investments are most suitable for your circumstances. When the stakes are high and there are thousands in hard-earned capital hanging in the balance, you want to ensure that whichever move you make is not misaligned with your goals and investment strategy.
A common question new investors face is whether to keep, say, R100 000 capital, invested in a liquid investment or use it as a deposit on a rental property. Here, we look at what to consider before making a move, with the help of Jerry Mahlangu, head of investment distribution at Momentum.
What does your existing portfolio look like?
The most obvious difference between a property purchase and investment in a unit trust or share portfolio, for example, is that the one involves quick conversion into a fixed, tangible asset, while the other retains its liquidity. Most financial experts would caution against tying up all capital in a fixed, non-liquid asset such as a property, since if the need for cash arises, it could be a while before you get offers from potential buyers – and even longer before you get an offer that you are willing to accept.
So, before you lock a sizeable amount into a deposit on a property, look at your existing portfolio. Are your liquidity needs catered for? Are you on track with your retirement savings and emergency fund?
Time in the market
Time in the market also strongly influences this decision, which is why Mahlangu recommends asking yourself how long you are planning to remain invested. Putting R100 000 down as a deposit on a property that you’ll spend the next, say, 20 years paying off means a long-term commitment, with the benefit of a (hopefully) appreciating asset at the end of it. Mahlangu notes that it’s also worth reflecting on how much of an impact R100 000 would make on your bond: on a R1 million property, a fair deal, but on a R3 million property, not as much. If there is limited material impact on your bond repayments, you need to ask yourself whether it’s worth parking your capital into property.
If you keep the property occupied by reliable tenants during the bond tenure, you will receive a steady rental income, adjustable against inflation and market demand over that 20-year span. However, you also need to factor in the costs of a property investment, which may include transfer costs, rates, insurance and maintenance.
Where are you on the risk spectrum?
A well-selected investment property can leave an investor reaping those benefits, but as we know, markets have their ups and downs, and property is not exempt from these movements. So, how much of a risk are you willing to take with your chosen investment? Mahlangu says risk appetite should be taken into account with any investment decision, not just the one in question. A property, when invested in over the long term, offers relatively low risk, but can yield a high return provided you’ve purchased a “winner”.
Speaking of location…
To increase your odds of a winning property investment, selecting a property in the right location is paramount. “A good location means better returns in future,” says Mahlangu. The right neighbourhood, proximity to popular amenities and services, and a promising long-term outlook in respect of developments in the area all play a role in positioning your property as one that will attract the tenants you want and appreciate in value.
The long term is definitely something you need to keep in mind with this type of investment. “Property is a smart investment if you keep it for a minimum period of 12 years,” says Mahlangu. “You would likely service interest for the first 10 to 12 years of the bond term, depending on your repayment amount,” he says.
Liquid alternatives
“If you are looking to access your investment within five years,” Mahlangu says, “liquid options will give you decent returns from three years onwards.” Think along the lines of bonds, which Mahlangu says give a decent five-year yield, or discuss the option of adding to or building a unit trust or share portfolio with your financial adviser. With shares (equities), Mahlangu labours the importance of spending enough time in the market in order to see good returns.
PERSONAL FINANCE