Every few months a journalist or some other ‘expert’ financial commentator will publish an analysis showing that investments in property, particularly residential property, seldom give as good a return as those in other asset classes, noticeably the JSE Securities Exchange.
Almost without exception these comments are invalid, says Bill Rawson, Chairman of the Rawson Property Group, because they ignore one of the prime advantages of property investment, the ability to gear it.
“Typically,” says Rawson, “the analyst will take, say, a R1 million investment in a new sectional title apartment block or security estate, giving an initial 6 to 7% return (on the R1 million). He will then compare this with the better returns one can still get from some of the good trust funds which can give anything up to 15 or 16% The property investment will then appear to be a poor performer in comparison to other investments.”
“What the commentators in these cases very seldom take into account,” says Rawson, “is that in almost every case the property investor is getting most of his returns on the bank’s money. He will, if he is at all shrewd, have limited his deposit on the property to 10 to 50% of its sales price – and he will be borrowing the rest from the bank in the form of mortgage finance, where the interest rates are currently very low.”
In practice, says Rawson, this means that the investor is usually getting between 15 and 20% on the money he has actually paid out – and probably also seeing satisfactory year-on-year capital growth in his property.
Many such investors, says Rawson, have spread their assets among anything from three to thirty properties (in some cases even more) and are collecting rents on all of them.
While it is true, adds Rawson, that selling a property at a fair price can be a slow process in relation to selling shares (which can often be achieved in 24 hours), property is the ideal asset class for those needing a steady income flow. This is because the rents are paid monthly. Furthermore when a sale is achieved in almost any middle or lower middle bracket home, the profit in today’s market will be significant.
Rawson says that a great deal of anxiety had been stirred up in the media about defaulting tenants and this is also used as a reason for dissuading people to put their money into property.
“Here again, however,” says Rawson, “this thinking is largely flawed. It has to be pointed out that provided, a good rental agent is appointed, the chances of being landed with a really bad tenant are not that high. Today professional agents have access to very sophisticated national credit and employment records and they can know which tenants to avoid. Many of the Rawson Rentals franchises are now running with less than 3 or 4% of bad debts.”
The ability to gear property investments places them in a class of their own...http://t.co/691hj31Xxc #investing #property
— RawsonPropertyGroup (@RawsonGroup) October 30, 2013
Rawson has, it should be noted, always followed his own advice. Today he has investments in many residential and commercial properties – and he has always argued against selling and has advocated instead riding out the bad times because with property, being cyclical, good times will always follow.
