Investing in property for buy-to-let VS Investing on the stock market
The debate of buying property to rent vs investing into the stock market has been raging on for decades. The statement from investors that, “I want to buy a property and rent it out so other people can pay off my bond”, is a very popular one that continues to surface regularly amongst investors looking to find a way to grow their hard-earned cash. The attitudes of these investors show a great commitment to saving and growing their assets – which is needed to attain financial freedom. However, investing and renting out property is not as simple as it may seem on the surface.
There is a great deal of risk associated with rental income and it is very easy to overlook the real investment risks associated with buying to rent, the considerable costs you might incur, not to mention the drain this type of investment could have on your time.
From an investment perspective, the mere thought of dealing with tenants who:
- Do not pay on time.
- Get retrenched and cannot afford the rent anymore.
- Damage the property (other than fair wear and tear).
- Host elaborate parties at the expense of the neighbours.
This can create a nightmare for any investor and that is only considering the tenants. There are still plenty more financial risks and implications with this type of investment!
This is not the kind of situation that one would like to occupy when investigating investment opportunities. I have often dealt with the frustration of the owners of these property investments. Generally, they state how rapidly the overhead expenses can skyrocket the minute you become the landlord. These overheads and expenses are for insurance, rates and taxes, monthly maintenance, damages, covering costs when you have no occupants, agents commission fees etc. You can see how quickly the expenses can build – especially if you are not prepared and well informed.
Life as we know, is not just a simple straight line with little deviation over time. The recent Covid pandemic is clear proof of this fact. If a property investor needs liquidity to overcome any financial challenges, they will have to sell the property and that can take anything from 3 to 12 months. Most investors wouldn’t invest over a million rand in a single company on the JSE, however that is effectively what is happening when you buy-to-let. Although there is a case for investing into brick and mortar – it is vitally important to understand the pitfalls associated with this type of investment.
By comparison, the case for investing/buying shares on the stock market does offer the investor an alternative which comes with more flexibility and the benefit of selling units at a short notice. This will ensure liquidity should the investor need cash in an emergency.
With the price of property and all the other associated costs of buying, diversification of any sort is exceptionally difficult. Buying shares provide immediate diversification by the nature of the various asset classes and fund managers available. To further diversify investments, these asset managers also offer portfolios that include offshore exposure – which over a 10-year period offered 18,96% investment returns (MorningStar, 2021). In addition to this – having a financial advisor review your portfolio and offer guidance could be exactly what you need to achieve your financial goals. According to Russell Investments, advisors added 4,83% more value to their client’s investment returns.
In summary, there is a case for both investment types. It is important for the investor to engage with a qualified advisor to assist them with making an informed investment decision. The advisor should conduct a comprehensive financial analysis and then provide the investor with the appropriate information and advice to decide on a plan.
Author:
Mike Clifford – Financial Adviser and Unit leader of IWCP Leadwood.
