Don’t build your retirement home with bricks

This article aims to provide findings and insights on investing in property in preparation for retirement planning, derived from Senior Investment Consultant at 10X Investments, Michael Rossouw.

In essence, there is more to investing in property. Rossouw articulates, “There’s a spreadsheet, and there’s the real world.” Investing in property on paper appears simple: borrow to buy property, get tenants to pay back the loan, and in 20 years, have assets that one will have to either sell or let, to help fund one’s retirement.

The main problem with investment portfolios is the lack of diversification. In a typical portfolio (pre or post retirement), an investor would look to diversify across different asset classes. As such, the exposure to any specific security would be modest, to ensure that one bad apple does not ruin one’s retirement.

Another problem with property is that the investor cannot diversify across time. Unlike a financial investment, the investor cannot enter or exit the property market gradually (as one does when adding to or drawing from a retirement fund). Even if an investor is debt-free by then, they are still at the mercy of tenants for their monthly income. To mitigate against this, one would need to own a good few such properties.

Furthermore, investors should want to keep their retirement finances low touch. Managing ‘buy-to-let’ properties is anything but, and often requires a considerable investment of the investor’s time, nerves, and energy. In the beginning, the investor might have the nerve and energy. However, when reaching retirement, it is unlikely to ever have all three at the same time, unless the investor makes this their business.

According to the FNB House Price Index, the average prices of houses have appreciated by just 5,2% pa over the past 15 years. Many are drawn to buy-to-let’s because it enables them to invest with minimal capital and leverage their return with debt. A handful may do well, but the majority will probably walk away with little more than a lesson about concentration risk.

In summary, investing in property alone is a high-risk proposition, more so if investors intend to fund their retirement this way; they are simply not adequately diversified.

While it is tolerable to have such holdings represent maybe 10% of their retirement portfolio and income, with the balance broadly diversified across other asset classes, relying exclusively on rental income from a small number of properties presents an unacceptable level of concentration risk. It is unlikely to be rewarded with an adequate return or provide a financially secure retirement.

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(Source: Moneyweb, 2020)




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