Month: March 2018

The persistent popularity of property

Chartered Wealth Solutions’ RetiremeantTM Specialist and Certified Financial Planner®, James Carvalho, assesses the value of rental property as an investment.

Over the past ten years or so, I have been party to numerous conversations that have debated the merits of rental property. I have frequently wondered what lies at the heart of this affiliation to property.

I have concluded that it is most likely the ability to own something tangible – you can see and touch it. (You seldom hear braai-side talk of share portfolios or unit trust portfolios!)

While property is certainly a viable option for investing, what many may not realise (if unprepared for the rigors of renting out property) is that this investment can be a source of persistent headaches.

The case for diversity

In 2011, in the wake of the 2008 global financial crisis, one of my clients was overwhelmed by her emotion in our meeting. She owned eight properties and suddenly, four of them were standing open. Three of the tenants had lost their jobs and one of them had moved to Cape Town.

Rental payments from her remaining tenants were barely covering her bond costs, and she still had three bonds over the properties.

For years, I had been encouraging her to diversify her risk in her investments. But, as so often happens, she was lured by the exaggerated returns in the property market, based on the promise of the boom years from 2002 to 2008. And the unfortunate consequence has been that, at present, she has managed to sell only two of the properties, and her rental incomes are not beating inflation, and nor is the annual growth on her property.

Still a sound investment?

Through a planning process, we as financial planners would establish what the optimum investment return would be for your money to sustain your lifestyle and to last the term of your retirement.

Generally, we find retired people aim at achieving a return of approximately inflation plus 4% with their funds.

In light of this goal, I note some of my clients’ responses, when I ask by how much their rental fees had increased. “Nothing this year; it’s been a tough year for my tenant,” or, “My tenant just lost his job so I am giving him a contribution holiday.”

Perhaps the most concerning comment was that the tenant would not pay and possession equals nine tenths of the law.

Despite these tales of rental regret, there are still many investors whose investment in property has given a positive return.

I would suggest that, if you are thinking of buying property to rent out, you consider the following:

  • Buying off-plan is appealing as there are no transfer duties. Transfer duties is a sunk cost: it is doubtful that you will recover this cost.
  • Schedule fixed rent increases in your lease – it obviates having to negotiate these every year. Rent should increase by more than inflation every year.
  • Establish a lease of twelve months, renewable with three months’ notice, thereby allowing you time to find a new tenant.
  • If you are a tax-payer, bond your rental property so that you can write off the interest against the rent.
  • Rental income is taxable and needs to be added to your tax return.
  • When you sell a property, other than your primary residence, it will attract Capital Gains Tax.
  • You need to be able to pay for repairs to the property; as a rule of thumb, you should keep 10% of the rent aside for maintenance.
  • If you don’t have the patience to deal with tenants, use an agent to rent out the property. This usually comes at a cost of 10% of the rent, but it is often money well spent.

In conclusion, I reiterate the timeless sound advice to ensure you diversify between all assets when investing: shares, cash, property stock, and corporate and government bonds.

And, remember, that your financial planner is always at hand to guide and advise you.

Small change for big change

I recently met with a client who retires in 13 months’ time. If you’ve read anything I’ve written, you’ll know I distinguish between the concepts of “retiring from” and “retiring to”. So, true to form, the discussion came up: “What is it that you are retiring to?” I asked.

My client is excited. He has an idea for a consulting business that will see him using what he’s learnt over the last 20 years, offering his skills and services to the private sector. It’s something inspiring for him to retire “to”. But it won’t be on a full-time basis – and it won’t give him the equivalent of his current income. This means that he’ll need to start drawing an income from his investments.

It’s about more than the money

This is the where the real acceptance needs to kick in. In my experience, there’s an emotional adjustment that has to be made. This sounds simple enough, right? Because we all know that the day finally does come. Isn’t that what we’ve been planning towards for the last 40 years?

Trust me when I say this: no matter how prepared you are, retirement still comes as a shock. Regardless of how much you save, you have to be up for the change. Or changes. There’s a mental adjustment: you’ve spent decades saving and now you need to start spending it.

Then there’s the emotional – and financial – reality around the probability of you never working again. And even if you do work, chances are you’ll earn far less in retirement than you did while formally employed.

Another emotional shift is our sense of worth and how we perceive the value we add to our families. If you’ve been the provider for many years, you might struggle with how you derive self-worth. If this is you, please be encouraged: you only have the money you have now because of your foresight and discipline. The value you add continues into the future because of this very fact.

But, the money is important

Another financial shift you’ll need to make? Realising that there is no point in drawing from your investments – only to put savings aside from that. It’s financially unwise, so just draw down less to start with.

My client admitted that some of these challenges are going to be real for him. He reminded me of his first money memory. It was something his dad taught him – that a fool and his money are soon parted – and it weighed heavily on him. What if he acted foolishly? Could he wisely manage drawing down from his investments?

This is why having an actual RetiremeantTM plan – and not just a string of investments – is essential. You need to know that you have enough so that the fear of running out doesn’t stop you from living.

But I promise you: this will not be enough to convince you – regardless of how disciplined about saving and investing you’ve been. You’ll still need to be open to change. But it takes time to accept a new reality, so be kind to yourself. It takes time to amend a mindset that has served you so well all these years. Remember, though, why you saved and invested in the first place – so that one day you could have the freedom to choose what you were going to do with your time, your money enabling that life. In the bigger scheme of life, your money is the “small change” that sets the tone for the big change – changes – you’ll need to embrace.

Change is hard. Not many people like change. But you are not alone as you face what’s ahead. If you don’t feel ready for the retirement road ahead, please book some time with me. Let’s talk small change – and big change – over a cappuccino.

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