For some time now, house prices have grown at a rate slightly below inflation and this continued house price decline in real terms has caused investors to take stock of their options.
However, real estate is and always will be, one of the highest yielding long-term investments, says Adrian Goslett, regional director and chief executive of Re/Max of Southern Africa.
If undertaken as a short-term investment, he cautions you might as well roll a dice and hope for the best.
Goslett says: “It is possible to make a profit off the sale of a property in the short-term, but this is dependent on market fluctuations and other factors out of your control.
“But, if you look at the statistics on house price growth over time, you will notice that, in virtually every instance, the homeowner will stand to make a substantial profit from the sale of their property if they choose to sell after the 10-year mark or later.
“This is because the ebbs and flows of the market even out over time to yield a more stable and substantial return.”
When weighing up investment options, Goslett, therefore, recommends that investors consider the returns of other reliable asset classes - money markets, for example - over the resale value of real estate over a 10-year period, rather than over a five-year period or less.
“When you do these calculations, you will discover that if you were to make a lump sum investment into a money market and leave it to earn interest for 10 years, your return on investment would be significantly lower than if you were to purchase a property for that same lump sum amount and sell in 10 years’ time.”
As an example, Goslett cites Lightstone Property statistics showing that a R1.6million property purchased as a primary residence in Claremont, Cape Town, in 2010 is now worth R3.5m.
“By comparison, if you had invested the R1.6m into a money market at a 10% interest rate for 10 years, the value of the fund would amount to R3.38m after tax.”
But while these amounts are similar, in the investment scenario, one would still need to pay rent over this period, Goslett notes.
In the property scenario, one would not.
“Assuming a 9% annual escalation in rent for a property of the same value, you would have paid roughly R1.4m in rent over 10 years.
“This leaves you with a net return of R1.9m on your investment, which is a R32000 profit on the original R1.6m.
“If you compare this to your house, which is worth R3.5m and will earn you a R1.9m profit, it becomes clear which is the better long-term investment option.”
Even if one did not have a lump sum amount available and chose to make a monthly contribution towards an investment fund instead of making monthly repayments on a home loan, he says the accumulated value on the investment fund in 10 years’ time will “still not match the return generated from the sale of the bonded property”.
“Using the above scenario, if you were to sell the R1.6m property 10 years into the home loan, you would generate roughly R2.3 m profit after subtracting the R1.17m still owed.
“For the same amount you were paying in instalments on your mortgage bond (roughly R15500 per month), you could have continued to rent and invest whatever was leftover into a money market instead.
“In this scenario, you would only generate roughly a R850000 net return by the end of a 10-year period compared to the R2.3m profit you could have earned if you had invested in property instead.”
Therefore, Goslett maintains property still generates the highest returns, when viewed as a long-term investment, but it depends on your personal needs and situation.
“If you are looking at a return over the short term, or you need to rent to build up some capital, a fiscal investment might be the better bet for you. But, over the medium to long term, a sound investment in property will likely yield you far better returns,” says Goslett.