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Property Confessions Of A Financial Analyst - Property Is A Bad Investment....But I Bought One!

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Property Confessions Of A Financial Analyst - Property Is A Bad Investment....But I Bought One!

A Moneyweb financial analyst wrote a very interesting article in Money web about “owning a house” – putting an investment spin on property as an asset and an investment and the disciplined form of saving it encourages.

Here is her “confession”:

I have a confession to make: I really dislike bricks and mortar property as an asset and an investment.

I wish I could tell you that it is because after months of number crunching I have come to the realisation that share investments, by comparison, will deliver a much better return on investment over time. Or that a careful analysis of property market fundamentals suggests that the future looks bleak. Or that I don’t believe property rights in South Africa will be protected in the long run.

I can’t.

Instead, from an investment perspective, the mere thought of having to deal with tenants who don’t pay on time, who damage the property or who host elaborate parties at the expense of the neighbours, is enough to make me look for alternative asset classes. (Even a cash investment sounds strangely compelling if it means I don’t have to deal with inconsiderate human beings.)

From an owner’s perspective (living in a property), I am still shocked at the extent to which these possessions can start attracting overheads the moment you become the landlord. And that’s without anything breaking. There are necessary expenses (curtains, security upgrades and a washing machine) and of course the unnecessary ones (furniture that will be “better suited” to the new interior).

Somehow, paying a fixed (lower) all-inclusive amount of rent to a landlord each month without the additional admin associated with property ownership, to me, is a very compelling “investment case”.

But I would be the first to admit that these are highly irrational reasons for being a property “bear”.

Owning property (or not!) is often a very emotional decision. One only has to browse the comments section of a lot of the property columns that have been published onMoneyweb to see how passionate the community feels about the issue. And very often, these views are based on very specific personal experiences readers had.

Yet, despite being so blatantly negative about property in general I went ahead and bought one last year. In fact, I would even go as far as to argue that for a lot of middle and upper-middle class South Africans (not all of them but a substantial number of them), it is a great idea to buy a property even though there are case studies that suggest that they might be better off by renting a similar house and investing the “saving” in shares.

Why?

It is because if you have a bond, you have to pay the minimum monthly instalment or risk losing the property. Better even, if you’ve signed a monthly debit order, it is almost like you never had this money in the first place.

By comparison, failure to buy stocks or pausing an exchange-traded fund (ETF) monthly debit order for some time, would not have the same tangible immediate impact.

Thus, buying property encourages a very disciplined form of saving over time. And ultimately a lot of the success associated with investment comes down to discipline.

In this instance the illiquidity (another characteristic of property I dislike) is also likely to work to the investor’s favour. If you have a financial setback for which you need to access cash quickly, selling the house is unlikely to be the first option as this will take time. (What about the access bond, you ask? More about that later.)

Financial planners advise their clients to “pay themselves first” – in other words to save and invest a portion of their salaries every month before spending what’s left on necessities and discretionary items. The reality is that for many South Africans it is frequently a case of spending first and in the event that there is something left at the end of the month, it may be saved or invested. Behavioural finance probably has an official term for it, but access to money in a current account (or worse: cash in a wallet!) is often almost an incentive to spend money unnecessarily.

Buying a property is a great way to pay yourself first, especially if not buying one and having access to this money would result in you spending it on discretionary items.

Of course, there are some savvy, extremely disciplined investors with clearly defined investment plans who do invest in shares, unit trusts and other asset classes diligently and who are likely in a better position for it, but they are a small minority.

But…

However, for those who do buy property, there is a big proviso. It should be paid diligently each month, in as short a timeframe as possible and without dipping into the access bond.

Again, this would require a very disciplined approach on the part of the bondholder.

Ultimately I guess, any investment comes down to understanding the limitations of your own make-up, where you are vulnerable to overspending or underinvesting and what strategy and asset classes are best suited to help you reach your investment goals. It may be buying property. It may be investing in something else.

But don’t underestimate how far a disciplined approach can get you.

Source – Moneyweb / Inge Lambrecht

 

Author Moneyweb / Inge Lambrecht
Published 03 Sep 2015 / Views -
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