Buy-to-let property still the best investment for the average investor

Rowan Alexander answers sceptic on this subject

Rowan Alexander, Director of Alexander Swart Property, the Cape Town northern suburbs estate agency, was asked by several business acquaintances to respond to an article which appeared recently on Facebook and was subsequently taken up by News 24 and Business Insider.

The article, by a financial consultant, was entitled 'Hanging on to your Rental Property may be insane'.

The author quoted a case where an investor bought a 2-bedroom apartment in 2001 for R210 000 and then spent R70 000 on renovating it, making his total outlay R280 000. He estimates that today the property's value is R1,58 million - but he is now collecting only R6 000 per month in rent (an annual cash yield of 4.56%).

"Clearly this is not a great investment from a yield point of view," said the consultant - and went on to say that, if the owner sold the home and invested the proceeds, he could draw a tax-free income of 5% for at least 30 years.

Those in favour of buy-to-let investments, said the consultant, would be certain to respond with the statement that the capital growth on the property was the really important consideration, not the rental. However, he said, the compounded return on the value of the property over the 17 years of ownership (before Capital Gains Tax) was 10% per annum - a figure significantly lower than that of the JSE All Share Index, which over the same period gave an annual return of 14%. A good equity unit trust, he added, would have yielded even more.

Replying to the article, Alexander made five main points, disagreeing completely with the consultant's opinions, on all of which, he said, there are very different views. He added that there are hundreds of successful property investors who would dismiss the consultant's views as totally misguided. Alexander said :

· Using one specific case of a particular property to arrive at a general conclusion, is absurd and contrary to all the generally accepted methods of analysis and research. Any competent property expert could produce case studies that would give a very different conclusion.

· It is quite possible that the purchaser in the case quoted, may have made a poor investment choice and is getting rentals below market levels. This possibility should not be overlooked.

· Rentals, like the property market, are cyclical: demand and supply always influences the market. It is common knowledge that in certain areas, at certain times, an oversupply of rental stock will drive rentals down. Downturn cycles however, almost invariably tend to give way to upturn cycles and when this happens property owners benefit significantly. Giving up a rental investment when the return is low, simply ensures that the property owner will lose out when conditions do improve. As has so often been pointed out, in property investment, it is essential to take a long term view.

· Comparing the return on an investment in the equity market with the yield achieved on property, is a common mistake which occurs frequently. In a property investment, one has always to bear in mind that the finance is usually "geared" and provided in the form of a bond --and such finance is far and away the cheapest form of loan available to the average borrower. What is more, the loan enables the bondholder collecting his monthly rentals, to benefit from the FULL VALUE of the property from the outset, even though he may be taking years to pay it off. The bank is in fact, helping the bondholder to become the outright owner of the property at minimal cost to himself. By way of contrast, the investor in the equity market has to pay the total amount upfront and, if he does resort to borrowing the sum required as a personal loan, will pay astronomical interest rates which greatly increase his risk. Furthermore - a point mentioned by the consultant but often overlooked - the total return should take into account the capital growth. When this IS DONE, the property investment will, in most cases compare favourably with that of any financial market investment.

· There will always be a demand for property-that is an established fact-and although the gap between the cost of renting and the cost of ownership in certain areas is currently substantial, the benefits of property go far beyond a simple calculation at any one single point on time. Property should be viewed over a long period and the investor should be aware of, and take into account, the fluctuations and cycles in the market.

Alexander concluded his comments by saying that the so-called expert's comments revealed a lack of understanding of the property market and a reckless willingness to be critical about matters he had never seriously investigated. Such sceptics he said, should get in touch with genuine property specialists, like those who organize the free Alexander Swart property education courses, which help steer people into highly satisfactory investments. If properly handled, property still is one of the best investment avenues available.

For further information, contact Rowan Alexander on 082 581 3116 or by email rowan @asproperty.co.za