Planning for retirement is likely to be low on your priority list in your 20s and 30s. At this time, one’s career is taking off, and one is probably enjoying having disposable income to spend on trips abroad or extravagant items. But many of the financial decisions you take now, including property investment, will likely affect the quality of your life as you age, says Carl Coetzee, BetterBond CEO.
The disturbing reality is that almost half of South Africans do not have a retirement savings plan, as 10X Investments notes in its recent annual Reality of Retirement report (2021). Additionally, half of the respondents in this report believed they would have enough for retirement if they started saving at age 30.
Investing in property in your 20s
“We know that people generally begin to think about their long-term financial future, and that includes buying a home when they feel they have grown financially. In fact, according to data from the BetterBond app, the average age of first-time homebuyers in South Africa is 36,” says Coetzee. This means that the average first-time homebuyer only has 24 years to invest in a home and pay the deposit, typically a 20-year loan repayment period. “Considering that for the first couple of years you are paying the interest on the home loan, it makes more financial sense to buy a home sooner rather than later,” he adds.
If you delay and buy a property in your late 30s, you’ll have lost at least a decade of retirement savings. Research from the UK suggests that lifetime tenants will need to save almost twice as much in their pension to cover rental costs when they retire, compared to landlords who will have paid off their obligations by the time they retire. will stop working. “So it makes sense to get up the property ladder as early as possible so that you can harvest the rewards of your investment in your older years.”
The great news is that young people are interested in buying a home sooner rather than later. A 2021 TPN survey found that renters in the 18-29 age bracket have the greatest desire of all age groups to buy a property in the next two to five years, and they are also less likely to want to continue leasing or renting. “While affordability is often listed as a reason why young people choose to rent over buying a property, at the current prime rate of 7%, it is often cheaper to buy than to rent a property of equal value”, Coetzee explains.
For example, the average monthly rent for a one million Rand property is around 7,800 Rand. At a prime lending rate of seven percent, the monthly repayment of bonds on the same property would be comparatively less than R7,753. “Although there are other costs associated with owning a home, as a long-term investment property could become an income-generating asset. This will come in handy later when you rely on your pension for income,” he says.
As rental properties are not without challenges – rental yield can drop due to market pressures, and seeing tenants can be stressful – they shouldn’t be the only source of income during retirement, adds Coetzee. But since the property is a reliable asset that can deliver a significant return on your investment, it should be part of your planning for future financial security.
“Keep in mind that people are also living longer, which means they have to save more years to have enough money to benefit from their retirement. So having an income-generating property will be a boon at this stage of life. You could also be able to access your deposit money, if necessary. This could be used to start a business or help your kids buy their first home.
“It’s never too early to view real estate as a tool for long-term savings and investment, and with the repo rate at its lowest in over 50 years, even buyers of the next generation. So z can afford to gain a foothold on the real estate ladder now so that they have more financial stability in the future,” Coetzee concludes.
Five advantages of investing in real estate in your 20s
1. It is a stable, long-term investment
Over time, real estate has proven to be a very stable investment compared to other market sectors. While the market has its ups and downs, but the real estate market as a whole tends to be much less volatile than other investments like the stock market. This may be because the property takes longer to sell (and the shares can be sold in a second), and the property is almost always in demand.
2. You can take advantage of your property investment
Being able to leverage your property means you can buy more with less. This happens when you make a down payment on the property, and the bank lends you the rest.
Leverage helps maximize your return on investment when you are growing.
Note: Do you know how many banks would lend you up to 95% of the value of your shares? It says a lot about how banks view property security versus the security of stocks as well as other investments.
3. It can create positive cash flow for you
One of the advantages of owning an investment home is that you can rent it out to tenants. If you can charge enough rent to cover your expenses, you are effectively getting someone else to pay off the bond for you.
You post the deposit, and the tenants pay the mortgage and expenses. If you are smart, you will have some cash left, which is positive cash flow and passive income. Over time, as you pay off your bond, you get even more positive cash flow.
With enough time and enough property, that cash flow can eventually fund your lifestyle, and you could even quit your job altogether.
4. The property can offer tax advantages
The property is excellent when it comes to tax benefits. There are many tax benefits that you can claim. For example, if you lose money on your investment property (negative debt), you can offset it with your income and thus guarantee tax savings. You can also claim depreciation on equipment and accessories, amplifying your tax savings. In many cases, you can even request a visit or two per year to inspect your property and accommodation while you conduct the inspections.
5. Long-term investment (with potential financial freedom)
Many people like property as an investment because it can be an excellent long-term investment. They are no longer building land, so by securing your parcel of land today, you can reap the benefits in the future.
As inflation (the devaluation of money) increases over time, your property is likely to increase in dollar value; rents are likely to increase as you invest in the right district. This means that your cash flow improves over time as you charge more rent and your mortgage goes down or stays the same.
This positive cash flow can be used to finance more investment properties or to finance your lifestyle. For example, I recently read the story of a retired lady who owned only two investment properties and was financing her lifestyle far more than the pension would provide her.
Seven disadvantages of investing in real estate
Real estate investing is not just rainbows and lollipops; there are also downsides associated with real estate investing.
1. It is not very liquid
Real estate investing is not just rainbows and lollipops; there are also downsides associated with real estate investing. Shares you can sell at any time. However, the property takes longer to sell. Depending on the region, selling your property can take weeks or even months. This lack of cash can be a disadvantage if you need to access your money for emergencies quickly.
2. There may be hidden problems associated with the real estate
It would help if you did your homework – get a building and pest inspection, make sure your property meets the highest standards, review the rental application, and more – but there will always be some hidden problems associated with the property. It is very rare that you will buy a property and put it in ‘set and forget mode. There will always be something to pay, rent to pay, an unexpected bill.
That is why not everyone does it. Be effective in managing your risks and protecting yourself against these hidden problems.
3. The property has a high cost of entry.
With house prices steadily rising, it is becoming increasingly difficult to enter the market. These high entry costs keep many investors away, and it isn’t easy to start investing if you don’t have a lot of money to back you up.
4. Changes (e.g., vacancies, interest rates) can affect your cash flow.
Because homeownership is such a substantial investment, you will often have to pay a bond. Sudden changes, like vacant houses or rising interest rates, can put pressure on your cash flow.
5. You could be putting all your eggs in one basket
Due to the high costs of investing, it is common for investors to put all their eggs in one basket. Unfortunately, this lack of diversity exposes you to devastation if the market changes suddenly or if your investment doesn’t perform as you would expect.
There are two ways to fight this.
a) Diversify: Try to have a rich mix of investments, for example—properties, stocks, raw materials, businesses, etc.
b) Specialize – Get good at investing in real estate by developing your skills. The more qualified you are, the lower your risk and the greater your potential return on investment.
6. Bad tenants can be a nightmare
Not only can bad tenants affect your cash flow if they don’t pay rent, but they can also be a nightmare at times. Bad tenant stress can be intense and can lead to emotional and financial stress. But, again, the real estate sector is not always a whole and forget about investing; sometimes it takes a lot of work and, yes… a little stress.
7. Permanent and additional expenses
The property comes with ongoing costs that you don’t find with other investments. Insurance fees, advisory fees, mortgage payments, maintenance, renovations, etc. These ongoing, additional charges can be regular, or they can come as a surprise when you least expect them.
With proper planning and a suitable investment, you could get a property where rental income exceeds all of those expenses while putting money in your pocket at the same time.
Is the real estate investment suitable for you?
There are pros and cons to investing in real estate, but it could lead to financial success and financial freedom if you do it right. You also have a lot of power to manage your risks and take control of your investment portfolio.
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