Although it is by no means always the case, there is a small grain of truth in the old taunt “those who can’t do, become financial consultants”. Recently, a long-term client of the Terblanche Thomas Group with a large portfolio of rented properties reported that a financial adviser had assured him that if he sold his property portfolio, the adviser could guarantee a better return from the money invested in the traditional low-risk property market.
But this sort of comment is often made without taking into account several factors, all of which actually radically alter the calculations. The first is that the return usually estimated by the adviser is based on the current value of the property, not on what the investor actually paid for it two, three, four or five years ago. The second factor often overlooked is that in most cases the investor is making his money on the bank loan (his actual initial investment is often no more than 10 or 20% of the total cost of the property including maintenance).
The third factor that is often not taken into account is that if the investor were to sell his property portfolio, he would often be liable for a substantial Capital Gains Tax on the profit of any secondary (investment) property. Even on his own primary home, if the property’s value exceeds R1.5-million, the Capital Gains Tax could be hurtful.
Such arguments by financial “experts” are also often backed up by the very valid point that rates and taxes are increasing rapidly. It has to be admitted that these have become a type of wealth tax. They continue to rise because living conditions in many of the poorer and disadvantaged areas really do need improvement and upgrading. However, these rises are often more than compensated for by rising rents today.
In certain areas less than half of the ever-hopeful bond applicants are successful in getting finance for their homes. This means that, contrary to the declared government policy, there is a growing need for rented properties. In round terms it also means that residential units today very seldom give less than a 5% return and often the figure is closer to 10% – from day one. The buy-to-let market is, therefore, a very good place to be right now and this situation can only improve if and when interest rates rise, which would make it even more difficult to get home loans.