Rental Returns (the numbers)

[RogueTr00per]

Buy-to-let property "investments" are like non-interest bearing savings accounts deposits... only much, much, much worse.

This is true. It's only worthwhile if your "investment" gains significantly in capital growth over the period concerned.

 

[F40]

Buy-to-let property "investments" are like non-interest bearing savings accounts deposits... only much, much, much worse.

Apologies. My post was inappropriate.

It is actually much worse than what I said.

 

[Pho3nix]

General consensus being buying to let isn't worth the effort?

 

[HavocXphere]

General consensus being buying to let isn't worth the effort?

Read the thread? There isn't much of a "general consensus"...

 

[RogueTr00per]

Sell your investment properties now

General consensus being buying to let isn't worth the effort?

You can make money from it so long as you do your homework as to where / how you buy your investment property. There's a guy on Moneyweb by the name of Magnus, and he is very much against property as an investment.

There are other articles on Moneyweb that argue the other side of the coin.

http://today.moneyweb.co.za/article.php?id=775581&cid=2014-09-11#.VBFty_mSz-s
Sell your investment properties now
Magnus Heystek 2014-09-11

In many respects an investment advisor is like a priest hearing a confession from one of his congregants.

As part of your due diligence, which is required by law, you have to ask a potential investor a lot of questions about their investment history, returns on investments et al, in order to make a suitable recommendation.

Clients are also living proof of some of the investment themes and/ or scams that have blighted the local investment scene over the last ten to twenty years and in some cases even longer.

With older clients you will see a lot of long-term investment endowments, old style retirement annuities as well as a scattering of investment failures, especially the more recent and spectacular ones, namely Sharemax and Picvest.

As an aside, it seems investors who have lost money in any one of these property schemes - and in the case of Picvest who had not lodged a complaint at the Fais Ombud before March this year - have forfeited their right to lodge such a complaint. It would seem that a complaint lapses after three years from the time you became aware of your loss or potential loss. I didn’t know this nor, I am sure, do the many thousands who have lost billions in these failed property syndications.

Everyone carries some investment scars. I have yet to meet a middle-aged investor who has not, along the way, made some major investment mistakes. The same goes for middle-aged investment advisors.

Slow or quick, you are still losing money

Some investors lose their money quickly, overnight, while others, lose their money or part of their money slowly over time, whether compared against inflation or against other investments.

Many people are aware that their investments are losing money but for some reason are unwilling to face up to this fact. They know an investment is failing but hang on hoping it will come right.

A great number of mostly middle-aged investors have one or more “investment properties” in their portfolios when you see them nowadays. This is a legacy of the previous propertyinvestment boom in which the banks, developers, the estate agents and also certain sections of the media all had a hand in creating.

The last boom in residential property prices lasted roughly from 2002 to the beginning of 2008, when the full impact of the National Credit Act kicked in and shortly thereafter, the Great Financial Crisis, which ended the party.

Since then many other countries in the western world, particularly the United Kingdom, certain parts of the United States, New Zealand and Australia, to name a few, have witnessed great revivals in property prices.

Not so here in SA. The residential property market is now in its seventh year of what I would call a bear market. I would describe a property bear market as one where gross prices are not, at the very least, matching inflation.

Unlike an investment market place - like listed equities where investment returns are sliced and diced in every conceivable manner - it is very hard to find good and reliable statistics on the residential property market. I would suggest that the best sources are John Loos from FNB and Jacques du Toit from Absa, even though they only reflect the actual experience of their respective banks.

The gap in providing reliable statistics on trends in the rental market has in recent years been filled by the dynamic Michelle Dickens from TNP.

Every quarter I carefully analyse the property statistics as best I can from these three sources, but it will never accurately measure the returns of each individual investor. At best it will just give a broad indication of the general trend in the market.

It’s during these “confessionals” with an investor that one can fairly accurately calculate returns on investment properties. You have the original purchase price, the annual rent, expenses such as municipal taxes as well as upkeep and repairs. That is if the investors keep a record of these expenses, which in many cases they don’t.

Property returns difficult to measure

I say fairly accurately as one still has to make an assumption on the potential market value of a property plus the “exit fee” of selling the property, if that is a consideration.

The calculation is also complicated by the level of gearing on the property; some are non-geared while others have been purchased with 100% bonds.

Not something that will make the actuaries happy but that is the best way to do it.

Over the past year so I have done many such calculations, including regular ones on my own portfolio of residential properties.

I have yet to come across an investor whose portfolio has been performing at better than a net rental return of 3% per annum, especially since the start of the bear market in 2008.

In many cases the resale value of those wonderful properties sold by means of leaflets at traffic intersections are worth less than the original purchase prices in nominal terms, not real terms.

In real terms some investors have lost between 30% to 50% over the last six years.

Offshore investments, depending on the timing, have given a return in excess of 200% and more over the past five years.

Penny dropping

But the penny seems to be dropping. Almost on a weekly basis now am I receiving emails from the Moneyweb community with the same message: my rental properties are not performing. The rental yield is dropping and is being squeezed by ever-rising municipal rates and taxes, tenants who cannot afford rising rentals as well as, in some cases, propertyowners who cannot get rid of non-paying tenants who are hiding behind the PIE-act.

And then there are vacant plots of land which do not even earn any kind of income. That must be the worst investment in the world: you have already lost half or more of the value of your original investment but you cannot get rid of it....

For an investment property to be or become an acceptable asset class you need certain prerequisites:

1. A growing and vibrant economy. Our economy is not growing in real terms. Only this week global banking group Morgan Stanley downgraded SA’s growth rate for the immediate future to below 2% for the year - even that number is considered to be optimistically high.

2. Access to bank finance. Bank lending has become very tight and is set to become even tighter in the near future in the wake of the African Bank collapse. That is forcing people to pay cash for their investment property - a very bad option.

3. Rising confidence. Our confidence levels are currently the lowest in 15 years and seem to be dropping every quarter.

4. A rising number of wage and salary earners who are your potential customers. It’s a myth that rentals are keeping pace with inflation, as some marketers of investmentproperty often proclaim. Rentals are lagging inflation due to the fact that wages and salaries are not keeping pace with inflation, especially not on an after-tax basis. Most landlords I speak to “confess” that their tenants are getting free-passes on inflation- adjusted rentals. Its either that or an empty property.

5. Well-managed municipalities. The meltdown in many municipalities across the country, with perhaps the exception of the Western Cape, has been well documented. The wealth destruction in the form of dropping property prices in certain towns and even smaller cities as a result of this, is enormous.

But if they build, people keep on buying, hoping against hope that the laws of investments will be reversed for their particular development or purchase.

There is a lot of emotion in the decision to buy a property. When you buy a property you see the end product: it’s there in front of you and you can also live in it yourself if you have to. An investment portfolio on the other hand is simply a piece of paper with a number printed on it. On an emotional level the property wins hands down.

My final argument against further local property investments is the fact that it is a regionally-based and rand-based investment. It offers no protection against further declines in the currency.

Any foreigner who bought SA residential property in 2010 as an investment, for example, has by now lost between 50% and 70% in global purchasing terms.

Listed and liquid

A far better option to consider for those who have an affinity for property - and many do - is to invest in a property company listed on the JSE or a listed property fund. It gives you all the benefits of a property investment without the hassles and lack of liquidity that physical property represents.

As an “investment priest” it is my duty to speak the truth as I see it.

I do not see the situation turning around soon and I really would like to be proven wrong over time.

But right now, if I could, I would sell all my investment properties tomorrow and invest the money somewhere more liquid and where the returns can be measured and managed.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached on [email protected] for ideas and suggestions.

 

[TJ99]

General consensus being buying to let isn't worth the effort?

Not if you don't know wtf you're doing. I'd like to see any other investmentment that gives me an 80% return in a year.

Well apart from pulling a Breaking Bad

 

[saturnz]

A bank will give you a huge some of money to buy a property, and like some have mentioned here, there are tax benefits associated with this loan and the returns should be looked at in that context as well.

If you were to try and make a purchase in any other asset class, no bank would give you that amount of money to start off with, so your opportunity cost of using a property as a savings vehicle is quite low. These things are not expressed in your calculation but in my view are important considerations.

For these reasons, if you don't know much about finance and economics a property is the best vehicle to use for the purposes of saving.

 

[Sideshow Bob]

Net income we have from one rented property is about 5% of the current property value. Capital gain is sitting at about 4.5% per year (last 8 years). You decide depending on your situation and other comments on this thread.

 

[saturnz]

Net income we have from one rented property is about 5% of the current property value. Capital gain is sitting at about 4.5% per year (last 8 years). You decide depending on your situation and other comments on this thread.

I decided to live in the place I intended to rent out and I started renting out my primary residence.

The investment property in the 4 years I've had it has increased in value by more than 25%. The moneyweb article is most likely people who spent during the boom days. Yes we are in a bear market but there are pockets where huge returns can be made.

In my building short term letting is extremely common (check out airbnb.com), which is something else to consider if you choose the correct location. The apartment is two doors away from me and is just about always occupied, and the owner charges R800 per night. Thats a bit more intensive though but the point is that if you choose the correct property (as with any other asset class) you will generate large returns.

By the way that same owner owns a penthouse as well in this building and asks R2500 per night but I'm not sure of the frequency of occupation in that unit.

 

[Dolby]

You forgot the part where the value of the house goes up with ~inflation. More if you picked the right area.

They don't increase that much though ; housing market is slow

The problem with factoring the value into the calculation is that it's value that cannot be banked until the asset is disposed.

... and you'll pay for that disposal of the asset. You'll also pay when buy the asset.

Isn't there a more attractive return with less overhead if one were to buy a property stock on the JSE ?

Often is it is.

I've got a property that I rent and property stock - but I'll be selling the real property to buy more stocks shortly.

It differs in many cases, but I've had dodge tenants since I started (late rent . no rent etc), the house is old so things break often (plumbing / leaks / geyser) and just the general upkeep can be expensive. When I dispose I lose R65,000.00 comm as well.

My shares, on the other hand pay out a dividend of 3.5% biannually, so I'm already getting 7%pa on the payouts. Take the shares at something small like a 3% capital growth and I'm getting a 10%+pa with no issues or drama.

And I don't pay to either buy/dispose of the stock

 

[Pitbull]

Trick to this is it should be long term investment. You get exceptional returns if the property is paid off and the growth on the value of the property together with the returns should make it more than fruitful. If you are buying and have a bond to pay then rent out the property to cover the rent you are not going to make money on the investment apart from the growth in the value in the property.

 

[Stefanmuller]

Have a look at investment property in Lephalale (Ellisras). Highest rental in the country at the moment with 3bed houses going for an average of R20k rent per month. With Medupi and other power stations being erected and planned for the next few years housing for rent is in huge demand to accommodate contractors and engineers. Getting a property while they are still available looks like a good investment.

 

[RogueTr00per]

...
I've got a property that I rent and property stock - but I'll be selling the real property to buy more stocks shortly
....

Pray tell what property stock would that be?

Trick to this is it should be long term investment. You get exceptional returns if the property is paid off and the growth on the value of the property together with the returns should make it more than fruitful. If you are buying and have a bond to pay then rent out the property to cover the rent you are not going to make money on the investment apart from the growth in the value in the property.

I can understanding having the property paid off if your aim is to build up a portfolio containing several buy-to-let properties, but if you only have one or two buy-to-let's then one could argue having a mortgage bond on the property is irrelevant or even preferable if you have a better use for that money that will offer better returns than the interest rate on your mortgage bond(s). e.g. mortgage bond at 9.25% vs putting your money into equities and getting maybe 15% returns per year?

 

[Pitbull]

Pray tell what property stock would that be?

I can understanding having the property paid off if your aim is to build up a portfolio containing several buy-to-let properties, but if you only have one or two buy-to-let's then one could argue having a mortgage bond on the property is irrelevant or even preferable if you have a better use for that money that will offer better returns than the interest rate on your mortgage bond(s). e.g. mortgage bond at 9.25% vs putting your money into equities and getting maybe 15% returns per year?

I was corrected on his in another thread. You do get a tax deductible if the property is on a bond. So my point is mute

 

[Dolby]

Trick to this is it should be long term investment. You get exceptional returns if the property is paid off

Using your example from the other thread of R1,000,000 cash, it's going to cost you R30,000.00 to transfer - so your total price is R1,030,000.00. If that increases at 5%pa (which I doubt) that house is worth R1,277,000 in 5 years. Sell it and you have under R1,200,000 cash after other costs. Work out what R1,030,000 shares go up if you're just doing 10%pa, compounded

That's no headaches or issues or physical brick/mortar - so far more liquid

 

[Dolby]

So my point is mute

It's silent?

Moot! hehe

 

[Dolby]

Pray tell what property stock would that be?

Missed this - sorry

Redefine Property. Bought in Sep 2008 @ R6.09 and currently @ R9.95, so the capital only grew 63% in that time. But each year was between 6-8% dividend and reinvested, it grows fast with compound interest ... really fast.

 

[RogueTr00per]

Using your example from the other thread of R1,000,000 cash, it's going to cost you R30,000.00 to transfer - so your total price is R1,030,000.00. If that increases at 5%pa (which I doubt) that house is worth R1,277,000 in 5 years. Sell it and you have under R1,200,000 cash after other costs. Work out what R1,030,000 shares go up if you're just doing 10%pa, compounded

That's no headaches or issues or physical brick/mortar - so far more liquid

Agreed. I suppose there are many scenarios that one can compare and this is only looking at one aspect of the debate. Certainly if sitting with 1 million in cash then the no mess no fuss route is to buy listed property shares.

I suppose that is where gearing comes in and the investor doesn't have 1 million in cash and has to get a mortgage bond. This gives you that exposure to capital growth on property concerned. Profits will take a knock until enough of the loan is repaid, but then at least while you are in the red then the "Loss" is tax deductible.

With property purchases the transaction costs are high as you have mentioned. As others have mentioned, you need to know what you are doing when it comes to property investment. Else you are far better off buying listed property or Index funds like Satrix 40, etc... If the market goes up everyone in those funds score. If the market goes down, everyone in that vehicle shares the same fate. There is nothing to work out other than how long do you want to stick around on the ride.

P.S. Thanks for the name of your listed property fund ^^