Warren Ingram tackles the dilemma of investing in property versus paying off a mortgage in South Africa, highlighting hidden costs, tenant rights, and the importance of financial readiness.
Questions/ Topics:
"So my question is about property and buying property at the moment. I have a property, a townhouse. I've had it for over seven years now and what I was wondering is the market looks good at the moment in terms of buying property. And my plan was to firstly pay off my current property and then only buy property once I have paid off my current property. I think I'm looking at paying it off within the next 6 to 7 years. So now I'm just wondering, is it advisable to buy a property now and then rent it out or rather focus on the goal of paying off my current property and then only buy a property later."
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Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Warren Ingram tackles the dilemma of investing in property versus paying off a mortgage in South Africa, highlighting hidden costs, tenant rights, and the importance of financial readiness.
Questions/ Topics:
"So my question is about property and buying property at the moment. I have a property, a townhouse. I've had it for over seven years now and what I was wondering is the market looks good at the moment in terms of buying property. And my plan was to firstly pay off my current property and then only buy property once I have paid off my current property. I think I'm looking at paying it off within the next 6 to 7 years. So now I'm just wondering, is it advisable to buy a property now and then rent it out or rather focus on the goal of paying off my current property and then only buy a property later."
For more valuable insights from the 10X team, click here.
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
The Honest Money podcast is powered by 10x Investments, a licensed financial services provider. Consult with your financial advisor and let's 10x your future together, hi Warren.
Speaker 2:Firstly, thank you so much for this amazing and much needed podcast in the South African landscape. So my question is about property and buying property at the moment. So I have a property at Townhouse. I've had it for over seven years now and what I was wondering is you know, the market looks good at the moment in terms of buying property and my plan was to firstly pay off my current property and then only buy property once I have paid off the my current property. I mean, at the moment, I think I'm looking at paying it off within the next six to seven years. So now I'm just wondering is it advisable to buy property now, while you know it's still a buyer's market, and then, you know, rent it out and that sort of thing until I'm ready to move into it, or rather, focus on the goal of paying off my current property and then only buy property later? I would really appreciate your thoughts on this.
Speaker 3:Thank you so much. Thank you, property buyer. That's a fantastic question, and I appreciate your kind compliments on the Honest Money podcast as well. We do a lot of work to make sure that we provide content that's meaningful to our listeners, and so this kind of feedback is really awesome and gives us the energy to keep recording. So thank you so much.
Speaker 3:I think, just to understand, property for me is always a tricky investment decision, and so you have to know that. You know I have a kind of a bias against residential property, just in general, and so let me tell you that upfront and I'll explain why, and then let's try and figure out some thoughts around what you do. And so, just to understand, you know, when you buy a house, physical property, the transaction costs, I think, are enormous. You know, if you said you know, warren, I'm going to buy an exchange traded fund in an ETF and it's going to cost me like 5% upfront, it's going to cost me 3% a year, and then it's going to cost me another 3% or 4% when I sell one day, what do you think I would tell you that you're crazy. I tell you that the fees are ridiculous. And you know the low costs are an important part of investment success. But when we buy property as an investment, that's kind of what we do, right, we pay the lawyers fees, we pay the you know the high interest rates to banks, we pay the state agents to sell the property. You know there's a lot going on in terms of costs when we buy.
Speaker 3:And then of course we've got the risk, if we're buying, to rent out which is one of your thoughts is maybe to buy an on, then rent out. You know the regulations or the legislation around owners rights versus tenants rights I think are a little bit skewed in South Africa and it's very tough for an honest owner to get rid of a bad tenant. You know there are some tenants that will move into a property and, you know, pay the rent for a month or two and then just stop paying and then, kind of you know it takes an enormous amount of money again to get that bad tenant out. So I think just be careful around this, the kind of you know putting a property investment on a spreadsheet and thinking that everything works out on the spreadsheet and so that's how it's going to work in the real world. In the real world we get good tenants, we get bad tenants. You know we get good areas, we get bad areas.
Speaker 3:And so just understanding that you know buying a property, the fact that you can see that property and you can go and visit it, and you know if it's an apartment block you can go and walk in and knock on the walls and all those things, that makes it feel safe because it's something that you can physically touch, see and feel. But it's not necessarily the case. You know, anyone who's bought property in Johannesburg, for example, over the last decade would tell you that they probably have not even made back the original amount of money that they paid for the property, and so that's a disaster. And just understanding that, you know there might be some areas where you've made money in Joberg and some areas where you've lost. But if we had to say over an average, the average is not good, and so you know.
Speaker 3:I think if you're going to be a property buyer, you know you need to kind of look at a few things. So one of the big things for me is just understanding what the jargon is concentration, risk. You know, in plain language it's taking all of your eggs and putting them in one basket. Now when you buy property, in your instance, you might have one that you own and then you buy another one. So what you've got is all your eggs in two baskets and if both of those properties are sitting in let's say just say Joburg as an example that means you've got all your eggs in two baskets in one city in one country. It's not matched our vocification. It's actually a lot of concentration of your money in two big assets in one city and you need a lot to go right For those things to work out.
Speaker 3:For you then, and that for me, you know, it's the opposite of diversification, it's concentration, and concentration can work if you're very lucky. You know, if you buy one thing that goes up and delivers incredible returns, then you look like an absolute hero. But in most instances concentration doesn't work in your favor. You know diversification is good and so, again, you know, just going back to your situation, if you're looking at the property market and you're a buyer and you understand market because that it's a place where you live, you know you've been around for a long time and you've seen what property is doing in your area and you've got an idea of how things are working, then that means you've got some, an element of market information that works in your favor. You've got some homework done and an area of expertise that other people might not have, so that research might work in your favor. But I think when you're looking at property you've got to look at 10 and 20 year trends. And what's important to understand is, you know property prices rise because there are more people buying property over time than there are selling.
Speaker 3:Now, if we just look at Johannesburg again, you know and I guess I'm biased because that's where I live at the moment you know over the last decade we've kind of seen this growing immigration. You know people leaving Joberg and KZN and moving to the Western Cape, and so that's not everybody. Of course you know that's a certain segment of buyers and it's typically higher value buyers who are really suffering. And then you know people who are coming in at that sort of 750,000 to a million round level are finding that the property market in Joberg is not so bad for them because that you know they're finding there's a, there is demand. You know there are still a net number of people coming into Joberg and, as opposed to the immigration trend, I think the news kind of tells us that there's this immigration.
Speaker 3:Then we get the impression that everybody's leaving Joberg, and that's not true. What's happening is that higher income people with with more assets are more of them are leaving than are arriving. But then there are people that are you know, that are on the lower levels of income, and I'm not saying you know people who are, who are not employed. And these are people that have got jobs might be low, low, you know, like early stage career or relatively low paying jobs, but they're, they're moving into the city and they're buying their first apartments and so for them they're driving the property market up. So I think again, just be careful. You've got to understand the demographics of your city that you're buying in and what's driving the the the market in that time. And it's not a one year story, it's a 10 year story.
Speaker 3:So if, if we see the city of Joberg, for example, coming right, you know where the municipality starts to fix the roads, they start to fix the electricity in, a maintenance goes up and we see less load shedding, what could happen then is that confidence in the city gets reestablished and you find more people going into Joberg than leaving, more people wanting to buy property than those that want to sell, and then you might find a nice demographic title wave in your favor. But if the city goes the other way, you know, if the roads keep crumbling, if infrastructure and service delivery keeps getting worse, then I think the trend will be that more people will leave Joberg and go elsewhere, and it might not just be to the western cap. You know. If you see KZN coming right, or you know you see the eastern cap coming right, or the free state or anywhere in Popo, then you might find a net migration elsewhere, away from Joberg. So you've got to understand a long term trends when you when you're making these property decisions.
Speaker 3:I think you are absolutely right that it that it is a buyer's market in Joberg right now. And and then the question you've got to ask yourself is are these the smart people that have sold, or is it dumb money that is sold? And maybe the smart money would be coming into Joe Bignell because they see that interest rates will come down in the next couple of years, they see maybe that the tide is turning, that service delivery will improve, and if that is the case, then the smart money will be well rewarded by buying property in Joe Bignell. And I think that that's a big question you've got to answer for yourself before you buy, and I certainly have no idea. I tend to want to go for diversification. So for me I wouldn't be buying one property. I'd rather buy a property exchange-traded fund or, even better, like just a generic all-market exchange-traded fund where I have exposure to property companies, medical companies, hospitals, mines, all of those things where I'm not exposed to just one particular trend and that might mean that I don't get the best return in any one year, but I will get a good return over a long period of time. So I'm sorry I'm sitting on the fence, I'm not giving you a clear answer, but the truth is I just don't know. I don't know the answer to your question.
Speaker 3:And then maybe just my last comment is if you're going to buy the property, just understand that your cash flow needs to be able to fund the debt on that property when you don't have a tenant.
Speaker 3:So just be careful that you do a cash flow calculation. You say, well, my property is almost paid off. I can get a tenant in the other property and rent it out for a while. That's fine. But just be careful if you don't have a tenant for three months or six months, or you get the nightmare where someone moves in and then stops paying. It takes about six months to get that tenant out, and then you've got to fix the property app because I'm sure they're not going to be looking after it while they're not paying you, and so just make sure that cash flow wise, you can afford to fund that debt on that property for quite some time without a tenant, and then it might work out in your favor if all the other things that I've mentioned as well also work out. So I'm sorry if I don't sound super positive. I don't like putting all my eggs into too few baskets. I love diversification. I hope that helps, and all the best with your decision.
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