Question: I will be retiring soon and have an additional R2-million to invest. A friend suggested that I buy a rental property with this money, as it will give me a monthly income as well as capital appreciation. Should I do this?

Answer: I cannot give you a categorical answer without getting more information on your personal situation. However, I will run through the pros and cons of a property investment and show you some other options that you could consider.

One of the biggest advantages of buying property is that you can gear your investment. You use your capital as a deposit to buy a more expensive asset and then take out a bond for the balance of the purchase price. You put a tenant into the property and over a period they will pay off the bond.

You now get the capital growth on a much larger asset than your initial deposit. This is ideal for younger investors looking to grow their assets.

In your case, as you are looking at the investment to provide a retirement income, it probably would not be prudent to gear your investment in this way, so one of the biggest advantages of a property investment falls away.

I am not a great fan of using property to provide a retirement income. I came across far too many cases during lockdown where people suffered real financial hardship, as their tenants were unable to pay the rent and they had no income.

It can happen that you buy a property and the price doubles in a year, but, with most of the property investments that I’ve come across, the returns have not been that impressive once you factor in the costs. These include buying the property, maintenance, rates, rent collection and insurance.

Before you commit to a rental property, do the calculations to see what the after-tax return is likely to be. Remember, the rental income will be taxed at your marginal rate. You should then compare the returns with a couple of alternative investments that are passive and don’t require too much effort on your part. 

Investments to consider would include the following:

Bond portfolio

Long bonds are currently offering excellent value. You could invest in a bond portfolio that will give you a return of inflation plus 2% with very little risk. The downside here is that the income will be taxed as interest once you cross the interest exemption threshold.

Protected equity investment

The recent volatility in the market has resulted in some cleverly structured products being designed. These typically offer capital protection as well as upside growth based on the performance of particular indices.

This type of investment typically requires you to commit your money to a structure for five years, but, after the five years have elapsed, you can draw an income that will not attract any further income tax. This can be an excellent way of providing yourself with an inflation-beating, tax-free pension.

Discretionary investment

You can invest in a portfolio of shares or unit trusts. The returns on typical balanced funds have generally beaten the property market. Any income you take from this investment will attract capital gains tax, which is 40% of your marginal rate.

Voluntary annuity

Life annuity rates are still good and you can lock in a decent monthly income for the rest of your life. Only a portion will be taxable because part of your monthly payment will be classed as a capital drawdown.

As you can see, there are a number of options open to you. I would strongly recommend that you sit down with someone who can help you do the calculations and find the right solution for your circumstances. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.