Rental property as an asset class

One of the biggest decisions any investor will have to make in his or her lifetime is how to structure an investment portfolio to provide the right mix of capital growth and income at the appropriate times. Does a property, or several properties, bought specifically to generate rental income, have a role to play in this planning process?  For the purposes of this article, we will ignore an investment into REITs, or Real Estate Investment Trusts, which is fundamentally different to an investment in a “buy to let” scenario.

Firstly, property is considered an asset class in its own right. This is the classic “passive” investment scenario, although reality dictates that ownership of this type of investment is very rarely passive.

There are several very important issues that need to be considered before committing time and money to this asset class as there are risks associated with rental property, just as there are risks in other asset classes.

Most importantly, do you have the stomach to be a landlord who may be called upon to make hard decisions around a tenant not paying rent? For example, will you be able to evict a family that is struggling financially and put them out into the streets in winter?

  1. Do your homework to select an area and property type, e.g. should you consider a freestanding house, cluster, townhouse or flat? Select a property type that allows steady demand for rental space and also allows regular annual escalations of the rental.
  2. When choosing a tenant from a pool of prospective applicants, do your homework so that the choice is the best possible, both from a payment of rental point of view, as well as keeping your property in good condition.
  3. Be sure that you can commit to this investment for the long-term, as only in the most exceptional cases, will you realise a return of any sort in the short term.

If you have these basic issues resolved in your mind, the really exciting part of an investment into this asset class is that you can build substantial wealth by using borrowed money to a large extent. This is one of the reasons that investing in property is a long-term investment – it is possible to have your tenant pay off the bond over the property, but this will be over a long period of time. Be aware that the usual risks of borrowing money apply when it comes to buying an asset which will produce the income to service the debt that is created.

An investment in rental property, if managed correctly with meticulous financial records being kept, can also be tax-efficient, but this definitely requires good administration skills.

As independent financial advisors, we believe that rental property certainly has a place in your portfolio, but you need to be aware that it comes with a certain set of risks. Do your homework well and you may be pleasantly surprised by the long-term results.

Please call us if you need any further information about rental property as an asset class and how it can fit into your diversified investment portfolio.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Wayne Visser
Managing Director
FPM Risk and Wealth Management
011 778 9300