This is a follow-up article on the article titled why I’m selling my properties, In this article, we saw that you will accumulate about 20% more money by building an income property portfolio. Here are some of the issues with retiring with property.
1) It is a lot of work
The first issue that I touched on in the previous article is the amount of work property requires to maintain your investment. If you retired with an income property portfolio alone, managing the property becomes a part-time job. Granted, you can outsource the management, but estate agents can only advertise the property and hope for the best. For their efforts, they will gladly take 10% of everything you worked your whole life to achieve. The whole idea behind retirement investments is to sit back and watch the money roll in while you are spending the day on the golf course.
2) The tax is higher
When you live off your equity, about half of your income will be from dividends. Dividend income is taxed at a flat rate of 20%. If you do need to sell some of your capital, you will pay capital gains tax which is even lower. It ranges between 0% to 18% and is typically around 3% to 10% depending on how many shares you sell.
In comparison, property income is taxed as income tax, which is between 0% and 45%, typically about 20% to 35%. In the unfortunate event that you do need to sell one of your properties, the tax will also be calculated as capital gains tax as mentioned above. This is significantly higher than equity investments.
3) It’s a bitch to trade
This brings us to the next point, if you do need to sell income property, it is expensive. Trading costs are in the order of 5%. Even though it is paid by the buyer, it still means that he will be offering you less. The seller also pays bond cancellation costs, clearance certificate costs and estate agent costs of about 3% to 7%. The biggest problem, however, is that it takes a long time to sell. If you do manage to sell the property quickly, the transfer will still take 3 months or longer. If you need cash quickly, this is not an option. In comparison, equities can be sold in minutes, with trading fees averaging about 0.5%, or even lower if you trade using platforms like Easy Equities.
4) You can’t move
If you are managing your income properties yourself, you need to be close to them. You need to do inspections, maintenance and viewings with prospective tenants. For this reason, your properties can’t be too far from each other and you can’t be away for more than a month at a time. My dream is to pick about 30 countries that I would love to see and then to spend a month in each during retirement. This will not be possible if you manage your properties personally.
5) Concentration risk
As I stated above, you buy properties in one area, because you do not want to travel days to your properties. This, however, gives you a lot of concentration risk. If the property prices in your area fall, your whole portfolio drops. With equities, you own a small percentage of hundreds of companies in various countries and industries. One property that is performing poorly, will hardly influence your investments.
6) Income risk
If you lose one month’s rent, your income drops with 8.3% for that year. Everyone thinks that they are the exception, you will always have tenants in place. The reality is, you will miss a month’s income every now and then. Even the best tenants have financial troubles. Sometimes you just can’t find the right tenant and need to hold out for a month. You need to be able to cover the expenses for that month without getting any income.
If your whole net worth is invested in property, you are too exposed to one sector. Yes, you need property in your portfolio, but you need exposure to other industries as well.
8) Less excitement
There are legit companies in the financial, technology etc. industries that you would love to own if you thought about it. You can share in the success of these companies. Next time you are at a braai and someone says you must own Capitec, you can simply respond with “I’ve been having it”.
9) You don’t owe anyone money
This is a rule to live by, “Don’t owe anyone money”. “I wish I had more debt” – No-one, ever. Things go wrong, and people get fired. That is a reality for most of us. If you cannot afford to pay your mortgage for a year, you will lose the property. The bank will auction it and you will probably lose everything you have invested. If you can’t afford to buy equities this year, I doubt anyone but you will know. The less money you owe, the better you’ll sleep at night.
As I mentioned, property is a good investment and the numbers make sense, but I don’t feel that it should be dominant in any portfolio. Make sure the property you buy will still make sense years from now. Keep in mind that the turnover for properties is long and a property investment should not be made with money that you may require anytime in the next few years.
Be safe out there,
Quote of the week"Real estate is my life. It is my day job, if you will. But it consumes my nights and weekends, too." – Ivanka Trump Click To Tweet
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