All South Africans worry about retiring at some stage in their lives. Where are the funds going to come from? What is the best option: property or saving money in a retirement fund?
“Both have advantages, but property still has the best return,” says Just Property Invest’s Minette du Plessis. “You can enjoy the cumulative growth of a property investment, which is the combination of capital and rental growth.”
If you are shopping for the perfect property investment, Du Plessis recommends doing a comparative market analysis. “The right area is important in terms of growth and rental potential. Amenities play a big part too. Make sure that there are malls and schools close by, and easy access to major roads. Security is another important consideration. Tenants look for these aspects to make their lives easier.”
Du Plessis says reputable agents should be able to help would-be investors do a market analysis. Alternatively, property portals allow one to easily research the rentals in specific area, as well as the property prices, and compare the two.
“You don’t need to have lumps of cash to buy an investment property,” Du Plessis adds. “All four major banks offer 100% bonds to first-time buyers and good criteria clients.”
If you earn R30 000 a month and have a good credit record, you will probably qualify for a R1 million bond, she says.
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The large investment firms have calculators that will help you quickly work out what you need to put away for the lifestyle you want after you retire.
Du Plessis offers the following scenario: “If you are 36 years old and you want to retire by 60 with an income of at least R30 000 a month (which in 24 years’ time will be very low), you would have to save 17% of your income every month towards that. When the investment matures, you can only withdraw 33 per cent of the total (unless the total value is less than R247 500): the rest must be invested in a pension vehicle. Will 33% allow you to buy your dream retirement home? Will you be able to live off the residue? Each individual has specific needs and a unique asset portfolio.”
You need to do the sums. But there’s another option, says Du Plessis.
“You could instead buy a property for R1 million and rent it out. If you put the rental income, as well as the money that you would have been paying into the retirement annuity, into the bond, you could break even on that property after just 3 to 4 years. Then you can buy another property and build an investment property portfolio. By the time you are retired you will have a good, stable income and assets that have appreciated over time. You will also be able to leave your portfolio to the ones you love when the time comes.”
It is always advisable to discuss retirement provision options with a qualified, independent financial advisor. Consider all future expenses, factoring in big-cost items such as education for your children. Look at your levels of short-term debt and consider settling these before investing – you can then add the amounts you were paying towards such debt to your investment funds.
“On a weekly basis we are seeing clients who are looking for alternative investment vehicles to retirement annuity funds,” says Du Plessis. “They have realised that they won’t have nearly enough to survive when they retire and want to invest in property. They’re playing a catch-up game and it’s sad.
“Had they invested in the property when they took out their RAs, they would have paid off their first property years ago; in some cases they would have achieved double capital growth, and they’d be enjoying the rental income from their property portfolio in their retirement. I honestly believe it would have been a less stressful exercise from the beginning, especially with a good management agent at their side.”
Du Plessis says all investments have an element of risk and that doing proper research before purchasing is essential. She also emphasises that property, like a retirement annuity, is a long-term investment. “If you take that view, your investment will weather the cycles of the property market.”