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Investing in buy-to-let property

10 Nov 2014

In asset management terms, the term 'risk' is often used to describe the volatility of returns or, in simpler terms, the uncertainty and fluctuation of the investment returns. As such, a portfolio that offers smooth, predictable returns is less risky than one with highly fluctuating, uncertain returns.

A well-chosen and well-maintained buy-to-let property in the right area with a high and sustainable demand for rental property will continue to produce an ongoing monthly income for as long as the investor owns and rents out the property.

Most South African investors prefer investments that offer stable, smooth and predictable returns - in other words, low risk investments. This is because they are investing their life's savings for retirement and simply have no capacity for losses, and therefore, little appetite for risk.

Unfortunately, in the world of traditional investments, low risk equates to low returns, and while these low returns may be stable and predictable, they expose investors to a potentially greater risk: that they will not be able to achieve their financial goals.

Dr Koos du Toit, CEO of P3 Investment Group, says for most South Africans, saving up for a financially-independent retirement using traditional investment vehicles will demand higher risk investments to generate the higher returns required to achieve their goals.

He says this is a significant dilemma, since these investors have no capacity to absorb the potential losses involved in higher risk investments. Yet, he says at the same time, they cannot opt for lower risk investments if they are to achieve their financial goals, particularly that of a financially-independent retirement, because in the world of traditional investments, lower risk means lower returns.

The obvious solution would be a low risk investment that delivers not only smooth, stable, predictable returns, but also higher returns that would enable investors to achieve their financial goals.

Dr Du Toit says few investors realise that the solution already exists in the form of buy-to-let property investment, a low risk alternative to the traditional investment options, which has been used by the world's wealthiest individuals and institutions to create high returns that are also smooth, stable and predictable.

Buy-to-let property offers multiple, and therefore higher returns, in the form of an immediate and ongoing inflation-linked income, as well as long-term capital growth. These returns are also smooth, steady and predictable.

The ongoing passive monthly income generated by an investment property in the form of the monthly rental, is steady and predictable. A well-chosen and well-maintained buy-to-let property in the right area with a high and sustainable demand for rental property will continue to produce an ongoing monthly income for as long as the investor owns and rents out the property. The rental also increases each year in line with inflation or with the percentage stipulated in the lease, usually eight to 10 percent. This creates a passive, inflation-linked income for life and beyond if the property was acquired in a correctly-structured trust.

In countries such as the UK, estates and properties held in family trusts have been generating a steady, predictable passive income for the original landowners' descendants for 300 or even 400 years.

In addition to this smooth, stable, predictable income stream, buy-to-let property investors also enjoy steady capital appreciation on the property itself, as the value of the property increases over time. While property price inflation is subject to shorter-term fluctuations, it is not at the mercy of the kind of volatility experienced in the stock markets where prices can crash overnight. Over the past 20 years, property values in South Africa have risen 10.5 percent on average a year. Using conservative property price growth expectations, it is possible to calculate fairly accurately the future capital appreciation returns on a property.

The dual, and therefore higher returns on a buy-to-let property are not only steady, stable and predictable, but it is available to investors at a significantly lower risk than traditional investment vehicles. This is because buy-to-let property provides investors the ability to manage, if not eliminate, the risks involved through tried-and-tested risk management strategies that are simple and cost-effective to implement. In fact, buy-to-let property investment is virtually risk-free if prudent risk management strategies are applied.

Dr Du Toit says for investors who are looking for smooth, steady and predictable returns, but who are unwilling to accept the low returns it often implies, buy-to-let property as an investment alternative is worth investigating.

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