SHOULD I RENT OUT OR BUY SHARES?

I am 32 years old and have R350 000 in savings over and above my retirement savings. I am considering using this money as a deposit to buy an apartment, which I would rent out to cover the mortgage bond repayments. My thinking is that, over time, the rental will provide me with an extra income, and the capital value of the property will increase. However, a number of people I know seem to think it would make more sense for me to invest the money in shares. I know there probably isn’t one right or wrong answer, but how should I decide what to do?

Name withheld

James Wiles, a financial adviser at PSG Wealth in Melrose Arch, responds: Deciding what to do depends on what you are trying to achieve. To help you out and present some pros and cons, I will assume you are trying to use the capital to generate maximum returns over 10 years. The correct option will be how much of the following factors you are willing to accept: risk of loss, the time required and developing competency.

Using the money for a deposit to buy a mortgaged property has the following benefits:

◆ You are using relatively lowcost property-backed debt to earn a return on a potential R1 million property using only R350 000 (this is called leverage);

◆ You can expect returns of about 8% to 12% over 10 years before tax and before the cost of debt (remember that’s on the property value); and

◆ You have the control to find a good property deal and fully depend on your own skill of being a property investor/ manager.

The downsides:

◆ It’s a concentrated risk, because all the capital is in one property, in one area, with one set of tenants, in one jurisdiction (South Africa);

◆ You could lose more money than you put in, because the mortgage bond stays the same even if the property loses value; and

◆ You need to use a lot of your time to handle the administration of the property (or pay a property manager).

Investing the money directly into shares may offer the following benefits:

◆ You have the flexibility to buy and sell any time, your money is accessible and visible, there is less rigmarole, and you don’t have to deal with people, contractors and municipalities;

◆ Average annual market returns of about 14% to 15% over 10 years before tax (assuming you get the average); and

◆ You can concentrate or diversify your risk as much as you want, across industries, geographies and strategies. The downsides:

◆ The volatility of equities is much higher than property, so prepare for a potential downturn to give you a return of –40% in any given year;

◆ It is probably the most competitive market in the world, so the learning curve to earn a decent return is steep; and

◆ You need to use your time to learn to make good investment decisions (or pay a portfolio manager).

Lastly, it also depends on your personality: physical property is more tangible to most people and very hands on, whereas investing in shares tends to be more analytical and is usually done sitting in front of a computer using abstract concepts. In both cases, the ultimate return will depend on your ability to get good at it, which requires commitment of time and energy. Perhaps opting for which you have the most interest in will ensure you can stay focused on making it work and not lose money. The alternative is to seek a good investment professional for financial advice and let them manage your money for you.