Here’s an interesting question, and one that I have been asked frequently: “I want to invest; should I buy property and rent it out (buy-to-let property) or should I invest into unit trust funds such as Coronation, Allan Gray, etc.?”
Tricky question! We all must invest optimally to ensure maximum returns. After all, a couple extra percent in returns per year, compounded over, say 25 years, can have a major impact on your overall wealth one day.
There’s no definite answer to the above question, only a need to do a thorough analysis. So without getting too technical, let’s consider three of the most influential factors when weighing up the two options.
1. Leverage: No bank will give you a million rand so you can invest into unit trust funds. Property on the other hand, has tangible value and the great thing about investing in buy-to-let property is that you get to use the bank’s money to grow your wealth! This can be a fantastic wealth building strategy but be sure to do the numbers and budget properly. You need to account for unexpected costs such as repairs to the property, bad tenants, property sitting unrented and increases in interest rates. The last thing you want is to default on your bond repayments so be sure to have enough cash on hand when taking out a bond.
2. Diversification: It is a well-known fact that diversification is one of the most important components in achieving optimal, long-term investment growth. Unfortunately, purchasing property means you are investing a lot of money in one asset class, in one city, in one area. This might not be so bad considering property is a reasonably safe asset to invest in. Apart from the external, unexpected costs mentioned in the last point, it is unlikely that you will make a loss on the property itself. But are you investing your money optimally? The benefits of a unit trust fund, is that you can get instant diversification. By contributing R1000 a month, you can get exposure to the property market, equity market and global market all at once.
3. Liquidity: Dis-investing from a unit trust fund takes only a few days whereas converting property into cash is quite a lengthy process. You should give some serious thought to this point when considering your financial situation and which investment option would be the best for you. You don’t want to be in a position where you are faced with major unforeseen expenses but have all your wealth tied up in property.
So to sum it up, unit trust funds seem the easier way to invest and grow your wealth. Their track record is good, they are highly liquid and you get instant diversification. There’s also no effort on your part, no unforeseen costs and no risk of defaulting and getting your asset repossessed.
Don’t write-off buy-to-let property just yet though. Leveraging the bank’s money is a powerful tool in growing your wealth. So if you:
1) Can get a good interest rate from the bank
2) Are willing to do your homework and find an undervalued property that fetches good rent
3) Are prepared to play an active role in managing your property as well as the renting process of your property to save on agent’s costs, and
4) Have the liquidity or the cash on hand for potential unforeseen costs
Then buy-to-let property might just be your best investment choice.