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THERE is a general feeling that property is a far better and safer investment than equities. Personally, I believe that both are important within a diversified portfolio. There is one significant difference between them in that you will not be able to see the price of your property fluctuate on a daily basis. I suppose this makes for much better sleep.
Property as an investment class offers several advantages:
l It is a growth asset;
l Increased rentals ensure protection against the impact of inflation;
l It is not as volatile as investments in equities;
l It affords stability to any portfolio;
l The main question to ask when buying property is: "Is it with a view to letting the property to earn a monthly income or with the intention of making a capital gain?"
There are different ways in which one can make a property investment and each has advantages and disadvantages:
Property syndicationis where a property is bought by a group of investors who then on-sell units in the property to individuals. Although there have been many successful syndicates, I'm always wary that the price paid for the property has already been inflated when it's on-sold. Also, it often proves difficult to extricate yourself from the investment and although you may get good returns from rentals, you still need to understand the illiquidity surrounding an urgent sale. In addition, when you are an urgent seller, other buyers may only be interested in a bargain;
The purchase of a second property - not a holiday home. This is where you are comfortable with taking a bond and attempt to recover all your costs from the rental income derived. It would be wise to remember that, apart from the bond payments, there will be cost implications for rates and taxes, levies and maintenance.
Investors need to understand:
l There are transactional costs and suitable tenants need to be found, agents paid and, often when tenants change, months of no rental may result;
l The property needs regular maintenance and sale will attract agents' commission.
Over the last few years, this type of investment has caused investors much heartache as they have been unable to cover all their costs and have found that their bonds are greater than the actual value of the property. That said, many investors who have taken a long-term view have done well by buying in good positions and by not taking on too much gearing.
Property Funds - These funds are listed on the JSE and are mainly invested in shopping centres, office blocks and factories, allowing exposure for the small investor, who would not usually have sufficient financial means to tackle single-handedly. For many years, these funds did not appreciate in value, but over the last five years they've become much more attractive to pension funds because of the tax efficiency, and to investors, who needed exposure to property, but didn't want all the difficulties associated with it.
Before investing in property it's important to realise, as with equities, that it is a long-term investment and you should not expect immediate returns.
l The writer is a director of Bryan Hirsch, Colley & Associates and can be contacted on 011-880-4888 or email@example.com