We've lived through some challenging times, yet with optimism growing for an improved economy, residential properties will likely begin to feature in more investment portfolios. Real estate investment strategies depend on market trends, economic factors, and the financial goals of individuals, weighed against risks. However, history shows us that with the right financial planning, property acquisition or its inclusion in an investment portfolio, even in the worst of economies, does hold value.
Traditional investment strategy
A typical traditional real estate investment strategy is to buy-and-hold. This approach involves purchasing a property to generate rental income and is popular among those new to the property investment market. If one can purchase for cash, over time, not only does the property pay for itself through the rental income, but it will also provide a return monthly. This strategy is particularly favored by retirees using their pension fund payouts for acquisitions and those planning ahead for their retirement.
For example, consider June, who is now 66. Over the past 30 years, she bought and rented out 15 properties. She and her now-deceased husband effectively used their viability as good home loan candidates to purchase the properties, which are now all paid up, although they chose to sell eight of these over the years, funding some of the latest seven properties with cash. Both June and her husband retired in their 50s, and June's retirement is secure. She continues to reap the benefit of the rental income she receives and says she is comfortably well off. She has recently sold the home she lives in to move to a previously rented-out coastal property she owns.
Diversification
Buy to rent is not the only strategy that works to build wealth through property. Cobus Odendaal, CEO of Lew Geffen Sotheby’s International Realty in Johannesburg and Randburg says that diversifying a real estate portfolio is essential for maximising returns, mitigating risks, and adapting to changing market conditions. “While single-family homes are popular and logical, and the starting point for many investors, relying solely on this asset class can limit growth opportunities and expose your portfolio to vulnerabilities.”
This is why Odendaal recommends spreading risk across, potentially, some of the most profitable options beyond the single-family home. His choices include multifamily units, commercial properties, Real Estate Investment Trusts (REITS), and Short-Term Rentals like holiday homes and AirBnBs.
However, before diving into those options, Odendaal says it is essential to consider overall financial goals, risk tolerance, and resources. There are three steps that he believes should be considered or applied.
Three-step approach
Before diving into diversification options, it's essential to consider overall financial goals, risk tolerance, and resources. Here are three steps to guide your approach:
- Evaluate your risk tolerance: Each investment has a different risk profile. Commercial properties and short-term rentals, for example, carry higher risks but can yield higher returns, while REITs and multifamily units may provide more stable, moderate returns.
- Consider property management: As you diversify, managing properties yourself can become challenging. A reliable property management company can simplify this process, particularly for multifamily and short-term rentals.
- Plan for the long term: Diversifying a portfolio requires a commitment to long-term planning. Real estate markets can fluctuate, so it's essential to adopt a patient approach, especially with high-risk investments like commercial properties.
REITs have performed particularly well over recent years
When we asked Dawie Roodt, Chief Economist at Efficient Group, which in the current market is giving a better return - a REIT or rental property - he said, undoubtedly a REIT. “The most important disadvantage of rentals is the costs and the low liquidity. REIT’s costs are lower and liquidity much better as a rule. However, it’s easier to gear against rentals, and there may be some tax benefits as well.”
Roodt also pointed out that REITs generally allow for a smaller amount of investment, although they are more risky in terms of volatility, but rentals pose other risks. It’s clear that yet again, the choice of property investment requires much forethought, risk tolerance, and knowledge.
Cobus Odendaal concurs with Roodt that it is important to do your homework. “Each investment option offers distinct benefits and challenges, so choose those that align with your investment goals and financial capacity. With a well-diversified portfolio, you can be better positioned to weather market changes and achieve sustained, long-term growth in your real estate investments.”
Real estate investment trusts (REITs)
Examples of major South African REITs:
- Growthpoint Properties: The largest REIT in South Africa, owning a diversified portfolio of retail, office, and industrial properties.
- Redefine Properties: A major player with a substantial portfolio across various property sectors.
- Hospitality Property Fund: Specializes in hotel and leisure properties, catering to the tourism industry.
Investing in REITs offers a way to participate in the property market without the challenges of direct ownership. These funds provide liquidity, diversification, and a steady income stream, making them an attractive option for investors seeking stable returns.
