The JSE and finance forum for South Africa
General Category => Shares => Topic started by: Delusionsofgrandeur on June 14, 2015, 04:51:34 am
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My luck with stocks has not been great.I am thinking of buying a house/flat and renting it out.i would possibly stay there at some point but not at the moment.
However,Im not sure if housing is in a bubble at the moment.Any thoughts on this?
Also,is buying property in SA a good idea given the state of the country regarding crime,poverty,corruption and so on?
What are the pro's and con's?People always say "you can't go wrong with property".
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A shockingly disastrous thing to even think about. See also Patrick's blog.
Take the time to read these articles by Magnus Heystek
http://www.moneyweb.co.za/moneyweb-opinion/columnists/my-long-road-to-freedom-2/
http://www.moneyweb.co.za/uncategorized/sell-your-investment-properties-now/
Rather do ..
If you want to invest in bricks and mortar, do so via listed property counters on the JSE or a collective investment property fund. Far better still, invest into an offshore property fund. Last year the returns were in excess of 30% and no local rates and taxes that can be squandered.
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The most popular article on the blog is this one: http://investorchallenge.co.za/the-last-house-ill-ever-own/
The next most popular article on the blog is this one: http://investorchallenge.co.za/whites-cant-own-land-in-zimbabwe-excellent/
As you might be able to tell from those two, I don't think property is an investment ;D
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It generally is a good investment because:
1) It forces people that do not want to save, to save.
2) It's so hard to get in and out of, it usually is a very long term investment.
But maybe you should see where you went wrong in shares? As the market has been pretty rosy since 2008 - you probably made one or many basic errors. Some are: too concentrated (ether in stocks and/or sectors), buying and selling too quickly (trading when you should be locking yourself in for the long haul) and lastly, buying too many small caps (looking for huge returns instead of nice, steady returns).
Most of us have done this - I would put this down to school fees. Ether start putting money away in a few decent ETF's or start constructing a very long term portfolio with lot's of boring stocks covering a few sectors using large/mid caps with just a touch (<10%) of small caps.
Just my opinion - but if you going to stick with property, spread the risk, lesson the hassle and increase the liquidity and go for listed property.
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It generally is a good investment because:
1) It forces people that do not want to save, to save.
2) It's so hard to get in and out of, it usually is a very long term investment.
Yes, actually I have to agree with that. Most people won't save unless their is a gun or a lawyer pointed at their head. But as Mr Div says, there are far better places to save.
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Residential property is only one of many asset classes that you can invest in. For most people their personal residence should be all they need to invest in this asset class. Any extra money will do better if spread over other asset classes such as:
Commercial property (REIT ETF),
Stocks - Local,
Stocks - International (Rand hedge),
Stocks - Developed markets,
Stocks - Emerging markets,
Stocks - Small/Mid,
Stocks - Large,
Bonds - Commercial,
Bonds - Government,
etc
When people invest all their money in residential property (personal residence and rental properties) I get worried.
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Your primary residence is not an investment but a lifestyle expense.
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Your primary residence is not an investment but a lifestyle expense.
Very true.
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Your primary residence is not an investment but a lifestyle expense.
Could you explain this to me, because I only agree in the following two cases:
1. You have overextended yourself in the house you bought and you can only afford the minimum bond payment, forcing you to pay it off over 20years.
2. You can afford to put in extra into your homeloan but choose to spend that money on other lifestyle stuff?
As I see it, I tell all young guys (early to mid 20s) to get into a property as young as possible! The caveat being, they have to pay it off within 10years as the interest is the killer. If you are renting, you have nothing to show at the end of your stay in that property, you just paid off someone else's property. At least if you sell your property after 10 years, you should get most of your money back, even if you take the capital appreciation and subtract all the costs (interest, rates, levies etc) and made 0% on the property. This is my experience owning property (bought at 550k) for almost 10 years, paid it off in 5, and sold for 700k. If I rented that property I would have paid exactly the same as if I was paying a homeloan, rates, levies and those expenses.
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The majority of people that buy a primary property will live in it only. This is not investing for themselves but for their children who will sell the house at market value despite the fact that you paid double the amount in interest and upkeep.
This might be a different scenario as in my case.
I chose to invest my money and rent although I could have bought the property cash. This would have left me with no income whatsoever as I need to live off the investments.
I have now lived off my investments for over 3 years and despite the fact that I sent my 3 daughters to the UK and paid their rental deposits plus I relocated to Portugal and had to buy furnishings, laptops, medical aid and all the bling stuff, I am still R243K up from 3 years ago.
Had I bought property with the money, I could never have done this. I can now up and leave to where I want and have no ball and chain that comes with property.
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Your primary residence is not an investment but a lifestyle expense.
Could you explain this to me, because I only agree in the following two cases:
1. You have overextended yourself in the house you bought and you can only afford the minimum bond payment, forcing you to pay it off over 20years.
2. You can afford to put in extra into your homeloan but choose to spend that money on other lifestyle stuff?
As I see it, I tell all young guys (early to mid 20s) to get into a property as young as possible! The caveat being, they have to pay it off within 10years as the interest is the killer. If you are renting, you have nothing to show at the end of your stay in that property, you just paid off someone else's property. At least if you sell your property after 10 years, you should get most of your money back, even if you take the capital appreciation and subtract all the costs (interest, rates, levies etc) and made 0% on the property. This is my experience owning property (bought at 550k) for almost 10 years, paid it off in 5, and sold for 700k. If I rented that property I would have paid exactly the same as if I was paying a homeloan, rates, levies and those expenses.
I am going to try and explain why the house you live in is not an investment (my understanding of why not anyway :P). All investments essentially come down to two things, capital and income. You "invest" the capital in return for a stream of income. You can also reverse the transaction by selling a stream of income for capital (example ABSA pays dividends to people buying ABSA shares). Sometimes at the beginning of an investment you might not get an income yet, but the expectation is that you will at some point in the future get an income from the capital you invested (growth stocks, more risky since you don't know what the income is going to be). The reason the house you live in is not an investment is because you are not getting an income from it (the opposite in fact). You could argue that it saves you from paying rent, but I would counter that what you are actually getting is not income, but "utility". For example if you own a toaster, you get the utility of toasting bread, but no income. Just because it saves you from paying a restaurant to toast bread for you, does not mean you are getting an income from your toaster. I think this is what Orca means when he says owning your own house is a "lifestyle expense".
Another thing to remember is that when you buy a "house", you essentially buy two things: The house(bricks, timber, plastic, etc) and the land the house is built on. The house part is very similar to a toaster. It breaks over time and goes out of fashion and needs to either be refurbished, repaired or replaced completely. This part of the "house" is actually losing money constantly. The land part is what keeps its value on average. Depending on location the land value might grow faster or slower than inflation, but on average it stays in line with inflation over the longer term in a growing economy. If the economy tanks, like in Japan, land value plummet as well.
And finally, I think a lot of confusion comes in because people see that their house doubled in price in 10 years, so they say: Wow, houses are amazing investments! But they forget to subtract all the expenses they had over the 10 years like levies, repairs, upgrades, taxes, interest payments, opportunity cost of not moving to where a higher paying job is, estate agent fees, lawyer fees, stamp duty, etc. Oh, and don't forget about inflation, R10 now was only R5.60 10 years back.
Anyway, hope this helps. Houses are not magic bullets to wealth, they are just toasters on a bit of dirt :D.
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Your primary residence is not an investment but a lifestyle expense.
Could you explain this to me, because I only agree in the following two cases:
1. You have overextended yourself in the house you bought and you can only afford the minimum bond payment, forcing you to pay it off over 20years.
2. You can afford to put in extra into your homeloan but choose to spend that money on other lifestyle stuff?
As I see it, I tell all young guys (early to mid 20s) to get into a property as young as possible! The caveat being, they have to pay it off within 10years as the interest is the killer. If you are renting, you have nothing to show at the end of your stay in that property, you just paid off someone else's property. At least if you sell your property after 10 years, you should get most of your money back, even if you take the capital appreciation and subtract all the costs (interest, rates, levies etc) and made 0% on the property. This is my experience owning property (bought at 550k) for almost 10 years, paid it off in 5, and sold for 700k. If I rented that property I would have paid exactly the same as if I was paying a homeloan, rates, levies and those expenses.
It's good advice conrad. To make the renting route work, you need to invest what you would have spent on deposit, rates, upkeep and any other monthly savings. Young people, on the whole, are just not made that way and therefore buying IS a good investment for most. I know a few guys that did not jump on the property ladder when they where young and now regret it.
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These types of discussions are quite fascinating as you will always get 2 camps of thought on the matter. I firmly believe that the house you purchase is a lifestyle choice with a view to the future i.e. married, number of kids, and location of purchase. I do believe that it is expeditious to purchase a house which will satisfy your current and future needs (probably 10 to 15 years out) and as someone commented you are in the market. However this house is going to cost you over the years in respect to painting exterior/interior periodically changing the colour scheme (you or/and your wife don't like the colour) insurance (home owners) utility costs, rates and taxes (though some rental recover consumption costs from the rentor) extensions braai area, gazebo, swimming pool (maybe), security and a host of ad hoc costs associated with running the property. In a rental situation you notify the landlord when anything fails (scrutinize lease agreement meticulously for your costs) and of course the killer today is CGT on sale
In my opinion buying a primary residence is a must do but you need to be savvy as to how you map out your future investing program, and buying a house may delay your journey, or, you have a slow start. Once you have negotiated a bond then it is prudent to pay it down (but not fully) as quickly as you can afford, and you return to the bank and ask them to re instate the original bond amount over a 30 year period (or to the maximum period that the bank will agree to; also banks like to terminate bond repayments at age 65 - but this is a fallacy as you can extend a bond longer than this - mine runs to age 75). You then use the difference between the outstanding bond and the newly reinstated bond limit to invest in your desired instruments. You then start repaying of your bond as quickly as you can again and then run the reinstatement process all over again. If you want to you can use dividends/income from your investments to help pay back the bond, but I personally buy more shares with my dividends.
So in a sense I am advocating buying a primary residence as opposed to rentals, but more from the perspective that the bond is used as a piggy bank for you investment future.
Also I don't consider my car (recently purchased) or my home as part of my wealth at all though I do take my bond and installment as deduction to my wealth.
When I bought my house in 1980 my wife and I agreed that we would not consider relocating under any circumstances whilst the kids grew up and still I stay in the same house, costs can run away from you if you keep changing residency
As I said there are always 2 camps on this subject it just a matter of working out what you and your family want, because right now with the kids gone our house is a bit big given that we self clean the place :D
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I never get the "you are paying off somebody else's bond and if you buy you'll have something to show for it" argument. The money you save renting isn't exactly doing nothing and neither do you have a loan to pay off.
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Explain to me where you save money renting?
Property Value: 550k
Repayment: appx R5000 @ 9.25%
Interest at the beginning (reducing over time): 4k
Rates, levies etc: R2k
Rent: 6k
So you rent a place worth 550k for argument sake at a rental R6k pm. You, as the tenant, cover my R4k interest and Ill gladly cover the capital component (R1k). The R2k goes to covering the rates and levies. And I get to write off the rental against tax (interest, levy, rates etc). So you are still paying someone else's bond, no matter how you slice and dice it. Buy it, pay it off as fast as possible. I've seen what renting does to younger people vs myself who bought at 25 and drove a Shiti Golf for almost 16years.
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Explain to me where you save money renting?
Property Value: 550k
Repayment: appx R5000 @ 9.25%
Interest at the beginning (reducing over time): 4k
Rates, levies etc: R2k
Rent: 6k
So you rent a place worth 550k for argument sake at a rental R6k pm. You, as the tenant, cover my R4k interest and Ill gladly cover the capital component (R1k). The R2k goes to covering the rates and levies. And I get to write off the rental against tax (interest, levy, rates etc). So you are still paying someone else's bond, no matter how you slice and dice it. Buy it, pay it off as fast as possible. I've seen what renting does to younger people vs myself who bought at 25 and drove a Shiti Golf for almost 16years.
You are overstating the rent by far. Rent is typically 8 to 10% pa of the market price.
The flat I rented in Cape Town was worth R1.1m and I paid R5k pm. The one I now rent is worth R1.4m and I pay R6k pm.
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Rentals that can be fetched in JHB is significantly higher than CPT, especially if you work in Sandton and want to live in the surrounds...
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Rentals that can be fetched in JHB is significantly higher than CPT, especially if you work in Sandton and want to live in the surrounds...
The fact remains that your rent will be 8 to 10% of the VALUE of the property.
You can rent a single garage in Clifton for R12k pm or buy one for R2m to R4m.
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I was in investment properties for some time and coupled with the market being slow and incurring problem tenants I decided to sell up and use the funds in the stock market where results over the last two years have been steady at best and it got me thinking a few weeks ago of precisely what is being discussed on here in that the equity tied up in your abode(where you live) you will never see unless you sell and enjoy the proceeds and rent a property to live in. If it's your goal to leave the primary property to your kids then as has been stated previously you'll never enjoy the money!
A mate of mine sold his house a few years ago making a good profit and bought a small new build 2 bed house that he and his wife are more than happy with and now they spend their retirement travelling overseas 2 or 3 times a year and this is my plan so I'm in my early sixties now with no kids and I've decided to put my abode property up for rental it's on the Blouberg beachfront and my partner and I have decided we both want to live on a golf estate so we're going to give it a go and my rental income will cover the golf estate rental therefore my abode property is working for me and if we like the new lifestyle then I'll view the abode prop as an investment and probably sell in a few years when the time is right to fund that retirement lifestyle I dream about!
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Rentals that can be fetched in JHB is significantly higher than CPT, especially if you work in Sandton and want to live in the surrounds...
The unit I rent in JHB North is worth R1.1 and I rent it for R8000 excluding levies of R1500 which I don't have to pay.
Compared to 240 months that is roughly R4k pm I'm not spending excluding maintenance, taxes and a rising interest rate. (and the eventual fees + time when I want to sell it)
Now if I do nothing with that R4k pm and spend it on toys and new cars then sure, the house would be a better investment (and this is the story of the average middle class South African).
Added bonus is me not locked down in one area and being able to move when I want like I'll be doing come August.
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Explain to me where you save money renting?
Property Value: 550k
Repayment: appx R5000 @ 9.25%
Interest at the beginning (reducing over time): 4k
Rates, levies etc: R2k
Rent: 6k
So you rent a place worth 550k for argument sake at a rental R6k pm. You, as the tenant, cover my R4k interest and Ill gladly cover the capital component (R1k). The R2k goes to covering the rates and levies. And I get to write off the rental against tax (interest, levy, rates etc). So you are still paying someone else's bond, no matter how you slice and dice it. Buy it, pay it off as fast as possible. I've seen what renting does to younger people vs myself who bought at 25 and drove a Shiti Golf for almost 16years.
Rental yields are much lower than that, you also left out a bunch of expenses. Here is a more realistic example:
Price of prop: R550000
100% bond: R550000
Transfer cost and bond registration fees: R30,651.40 spread over 7 years (average time people keep a property) = R365pm
Selling cost: R30k spread over 7 years = R360pm
Rates and taxes: R600pm
Levies: R600
Repayment (interest portion): R4240pm
Repairs and maintanance (1% per year is the average) = R460pm
Insurance: R100pm
Rent at 8% yield: R3667pm
Vacancy rate of 5%: R183pm
Property management company (10% of rent): R367pm
Cash flow: 3667 - 460 - 4240 - 600 - 600 - 360 - 365 - 183 -100 -367 = -R3608
The tenants are clearly not paying your bond. You are losing money and you are taking on a TON of risk. Ouch. The devil is in the details. If you leave out half the expenses it will bite you later on. Been there got the T-shirt :'(
Also, the laws in this country are pro-tenant. It can easily take up to two years to evict non-paying tenants.
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I've often wondered about this very thing. There are a few guys that own quite a few flats in my building and the surrounding buildings. So I put together this spreadsheet (I hope its correct).
https://docs.google.com/spreadsheets/d/1CNGXFwqPFNSHuCnGsf5iJu6YyDr4f5vxTKSrZj3A4UA/edit?usp=sharing
It doesn't make sense to rent it out.
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Rental yields are much lower than that, you also left out a bunch of expenses. Here is a more realistic example:
Price of prop: R550000
100% bond: R550000
Transfer cost and bond registration fees: R30,651.40 spread over 7 years (average time people keep a property) = R365pm
Selling cost: R30k spread over 7 years = R360pm
Rates and taxes: R600pm
Levies: R600
Repayment (interest portion): R4240pm
Repairs and maintanance (1% per year is the average) = R460pm
Insurance: R100pm
Rent at 8% yield: R3667pm
Vacancy rate of 5%: R183pm
Property management company (10% of rent): R367pm
Cash flow: 3667 - 460 - 4240 - 600 - 600 - 360 - 365 - 183 -100 -367 = -R3608
The tenants are clearly not paying your bond. You are losing money and you are taking on a TON of risk. Ouch. The devil is in the details. If you leave out half the expenses it will bite you later on. Been there got the T-shirt :'(
Also, the laws in this country are pro-tenant. It can easily take up to two years to evict non-paying tenants.
I might have understated what it really could cost (though registration isnt applicable in this case). I had a tenant for two years, who looked well after the place, I rarely had maintenance issues so my expenses didnt get close to what you experienced. When he bought his own place, i sold it because as you said rightly MoneyChief, there is a ton of risk and i'd much rather take my chances with the stock market. :TU:
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My thoughts on this - http://www.stealthywealth.co.za/2016/07/investing-in-residential-property.html (http://www.stealthywealth.co.za/2016/07/investing-in-residential-property.html)
The short and long answer - it all depends :)