Banking on your home for your retirement

If you don’t have a pension fund, or have very little savings to sustain you during your golden years, you may want to use your property to fund your retirement.

Or you may feel that bricks and mortar feel safer than investing in stocks and shares.

The expression “safe as houses” sounds like putting your faith in your property’s value would not be a bad plan. But is it as foolproof as some people claim it is?

THE ADVANTAGES OF INVESTING IN PROPERTY

* There are various ways to invest in property and draw an income. You can rent out your home and live in a smaller flat until you’ve made enough to retire.

Or you could live in your home and rent out the extra rooms with online marketplaces like AirBnB (airbnb.com) or even lease your garage as storage space on platforms like Wahi (wahi.co.za).

You could also buy land to sell or rent, invest in commercial property or even buy more homes that can be rented out to secure additional income.

“Real estate is a favourable investment option because it does not only give you long-term growth, but it can be paid up completely and become your sole property while still generating an ongoing income if you choose to rent it out,” says Craig Hutchison, CEO at Engel & Völkers Southern Africa.

* You can’t make a fast, emotional decision and sell your property.

When there’s a downturn in the property market, all you have to do is ensure that you can still afford to keep the property that you’ve bought.

You could lose money if you need to sell urgently, but unless you’ve got debt collectors knocking on your door, you won’t necessarily lose everything.

“Although, with any investment, you do run a risk, such as a market or area dip or interest rate hike.

"Property remains one of the best investment options, however, as people will always need to have a home and no matter how big the dip you won’t lose everything completely and the home is still there and it’s yours,” Hutchison says.

But with equity investments, there’s a chance that you could panic and lose it all, says Jan Vlok, research and investment analyst at Glacier by Sanlam.

“Some of these risks include selling shares when markets are down – the most important time to stay fully invested,” Vlok says.

THE DISADVANTAGES OF PROPERTY

* Property doesn’t always outperform equities. As with any investment, property prices can go up as well as down. Prices have started to lag over the
past couple of years (between 2008 and 2016), delivering an average return of 3.8%, which is slightly better than some cash accounts offer in terms of interest.

The table on the right shows the annual average returns of shares (measured by the FTSE/JSE All Share Index), money market yields (SteFI Composite Index) and direct residential real estate (average prices of South Africa).

This draws a comparison between the potential returns that an investor in the stock market can earn in a bank account versus direct property.

“Once the figures are taken into account, it is clear that an investment in equities over the long term provides the highest yield,” says Vlok.

* Access to funds isn’t easily obtained.

Withdrawing from a trust could take a few days once you have completed a form.

Selling a home and getting the cash into your bank account can be a lengthy process that could take months.

“The way I view it is that it’s good to have a house but that won’t leave you with financial security,” says managing director of Old Mutual Unit Trusts Elize Botha.

* If you decide to rent, you could have problem tenants.

What’s more, properties can be expensive to maintain and the interest charged on mortgages and other fees can also add up.

“Provision must be made for factors such as unforeseen expenses, bad tenants, vacant property in the absence of tenants and, most importantly, the interest rate you pay and any possible interest rate increases,” Vlok says.

Property and equities both have pros and cons, and choosing between them isn’t that simple.

Botha says the answer in achieving a secure retirement is having a mix of property and other asset classes in your portfolio.

“Property as an asset class has given investors a good return.

“But all in all, I do believe in diversification. There isn’t a single silver bullet [to financial security in retirement],” Botha says.