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.
Recently, my client admitted that she is no longer capable of managing her everyday financial affairs. How can you and your planner prepare for this, should it happen to you?
Dr Sylvia Kree turned 91 recently and has many interests. She also still goes to gym regularly which helps her keep fit. “It is your responsibility to look after my financial affairs, and my responsibility to look after my health,” she regularly says to me.
Of late, Sylvia finds it difficult to manage daily financial matters, like banking, and she is daunted by the fast pace of changing technology. She also does not have any children and her nearest relative lives in the Cape. ‘Who will look after me when I am not capable of doing so myself?’ she asked.
Sylvia and I discussed appointing an administrator over her affairs. Sylvia agreed. “It’s comforting to know that my affairs are in capable hands. I feel reassured and confident that you are there for me, even now,” she says. “I do not understand all the financial terms, and also cannot retain that kind of information. So having someone taking over that responsibility is a huge relief.”
Start thinking about your wishes should this ever happen to you. Prepare for when you can no longer care for yourself. Take time to look at retirement villages and facilities before you need to – where would you like to stay? Do you want to move only once? Then choose a village with assisted living and frail care facilities – most of these cover that cost by a life rights arrangement. Talk this through with your spouse and your planner so that you are prepared before you are compelled to move because of injury or illness. Many of these establishments have waiting lists in excess of two to five years, so choose where you might like to live and put your name on the list – there is no obligation, so you can change our mind.
By thinking this through whilst you are still capable of contributing to the conversation will make the process so much simpler and in line with what you want.
When do you institute a power of attorney?
If you leave it too long, and there are early signs of dementia, a power of attorney may not hold. Under current legislation, the power of attorney would not endure in situations where you are no longer able to understand the impact of such consent. Rather pre-empt the situation and be prepared for such an eventuality.
Consider whom you would entrust with a power of attorney.
Build additional costs in your financial plan for such a situation. The cost and strain on family members can be overwhelming. The carer or child has to go through an onerous process to be appointed administrator or appoint a third party as administrator and/or curator.
Planners can facilitate and advice around these matters, having established relationships with administrators and curators. Experienced planners have been through this process before, and are aware of aspects of planning that you may not be. You should have a trust relationship with your planner that ensures that he or she is planning in your own best interests … and a time when you are most vulnerable should be no different.
Article by Christina Forman, Certified Financial Planner and Retirement Specialist at Chartered Wealth Solutions. Click here to access the second article in the series: When a loved one can no longer manage their financial affairs. One of our clients also shares their personal experience of the Implications of being a parents’ tax consultant and having power of attorney.
This May, Chartered Wealth Eastern Cape clients were treated to an evening at The Club on 12 Bird Street in the company of master raconteur, Rob Caskie.
While his audience enjoyed a sumptuous dinner and warming winter drinks, Rob wove a terrible tale of the Anglo-Zulu clash at Isandlwana. As a Chartered client himself, Rob used this account of the most dramatic British failure in battle to demonstrate the need to plan carefully … whether in the military or with money. Both can equip you to prepare for the unexpected.
Chartered Wealth Eastern Cape CEO, Donovan Adams, welcomed the guests to the historic The Club on 12 Bird Street. Pre-dinner drinks were enjoyed in the wood-panelled bar dating to its Victorian origins, with a comforting fire burning in the grate. The Club is a regular local venue for various community events, including Music Trivia evenings and High Teas … and this evening in May was no different, as the Chartered family in the Eastern Cape mingled and enjoyed catching up with fellow clients. Visiting from Johannesburg was Chartered Director and Retire Successfully brand ambassador, Kim Potgieter.