Choosing to invest in property in order to fund retirement continues to be a prevalent decision in South Africa, but one that requires serious consideration and groundwork.
According to Ricardo Teixeira, strategy consultant at acsis, how retirees choose to invest in property is crucial in determining the rewards that can be reaped, as well in determining the type of lifestyle led whilst in retirement.
He explains that investors looking to fund retirement with property could consider two options, either investing in a property unit trust listed on the JSE, or by actively purchasing property directly and leasing it out to tenants in order to accumulate retirement funding. “Choosing to take an active ownership role by managing a tangible asset requires substantial time and energy, whereas taking a more passive part ownership approach by investing in a property unit trust requires less input and effort from the investor.”
Teixeira says that the key to successfully investing in property is to understand what to invest in, when it is appropriate to invest and the decisions that will impact that investment. “However, the most important aspect to consider is how investors see themselves managing these investments whilst in retirement.”
He says that investors considering direct property retirement investments for retirement funding need to consider how the property and the maintenance of the property will be managed, as well as how the invoicing and financial aspects will be handled. “Purchasing and owning property directly as an investment enables the investor to have 100% control over all property management decisions. Taking on such an active management role is akin to being a property business owner who will navigate and control the success of the business.”
“Many investors don’t realise that a property portfolio is essentially a business that needs to be run effectively in order to generate capital return. Although the management of a property can be outsourced, it is important to consider who you partner with to manage your property as those decisions will materially impact the future value of your property as well as your tenant’s experience of renting your property. Acquisition and operating expenses such as transfer duties, legal costs, levies and taxes are important to consider when evaluating the viability of a property-related investment.”
Teixeira cautions that owning and managing a property is therefore decidedly complex and needs careful consideration when compared with investing in a listed property unit trust fund, which invests in a large range of properties. “By investing in a unit trust investors are able to gain exposure to buildings with large capital requirements, such as shopping centres, that one usually would not be able to invest in with less than R20 million capital.”
He says that the level of effort required to manage an investment becomes a very important factor because it will influence the lifestyle one will live in retirement. “An investor should consider how much energy and time it takes to manage their chosen investment strategy and decide how to invest accordingly. For example, investing in a JSE-listed property unit trust requires significantly less effort than investing directly in property. Both investment strategies are likely to yield comparable financial returns yet the difference in lifestyle experienced by the investor could be the difference between ‘living’ in retirement compared to ‘working’ in retirement.”
Teixeira says that investing in property is clearly a multifaceted decision and one that should not be taken lightly. “It is advisable to consult a credible financial planner when making investment decisions of this magnitude. Investors need to do their homework and thoroughly assess their needs and limitations as the actions taken today determine the lifestyle led in future.”