The recent Budget Speech brought little relief for South Africans facing another tough financial year. 2014 started off with the one-month anniversary of the implementation of e-tolls, a surprise interest rate hike ushering in the possibility of further rate hikes and the prospect of significant fuel price increases.
Buy-to-let property investment is effective, as it provides both solid, ongoing capital growth over the long term and a passive, inflation-linked monthly income.
This will place a further financial burden on consumers who have been struggling under the massive increases in electricity prices and rates and taxes, the crippling effects of inflation, especially food inflation and a debt-to-income ratio of 75.8 percent.
Against this backdrop, saving up at least 15 percent of your monthly income to ensure a comfortable retirement, as required by traditional retirement savings vehicles, is entirely out of reach for the majority of ordinary South Africans. Does this mean that South Africans should abandon hope of retirement and resign themselves to either working after retirement age or becoming dependent on the government or their children for survival?
Absolutely not, says Dr Koos du Toit, CEO of P3 Investment Group, who says what it does mean is that South Africans need to look for a more affordable, but still highly effective approach to making provision for a financially-independent retirement. And this alternative is already available - buy-to-let property investment, he says.
Dr du Toit explains that buy-to-let property investment is effective, as it provides both solid, ongoing capital growth over the long term and a passive, inflation-linked monthly income. Moreover, it is also affordable, involving little out-of-pocket investment, compared to traditional retirement savings vehicles.
A real-life example illustrates the affordability and effectiveness of buy-to-let investment as an alternative investment to ensure a comfortable retirement.
Let's say you buy a townhouse worth R450 000 in an area with good capital growth prospects and strong rental demand. The rental income from the property is R4 500 per month, with an eight percent per year escalation. The monthly bond repayment over 20 years at 9.5 percent interest is R4 195.
With a monthly levy of R450, rates and taxes of R180 and a rental management fee of R400 (to ensure the tenant and the property is professionally managed by a reputable rental management company), the total monthly expenses amount to R5 450.
This means that the investor will need to fund a R950 shortfall (the difference between the R4 500 income and the total expenses of R5 485) per month from his own pocket in the first year. Because the rental increases by eight percent per year, this shortfall reduces to R604 per month in the second year and to just R223 per month in the third year.
At the end of the third year, the rental is sufficient to cover all the monthly expenses, which means the investor no longer has to fund a shortfall from his own pocket.
Up to this point, the investor's total out-of-pocket investment has been just R21 328 (the total amount paid to cover the shortfall over the first three years), paid in affordable monthly instalments, especially when compared to the 15 percent of salary required by traditional retirement vehicles over 40 years.
But how effective is this investment as a retirement savings vehicle? From year four, the property starts to generate a monthly profit, which grows each year as the rental escalates. By the time the bond is paid off in 20 years, the property would have generated more than R1.36 million in income after expenses, and will continue to do so, although at this time (2034), the income from the property after expenses will be R17 500 per month.
Of course, over the 20 years, the property will also have increased in value and, using a conservative eight percent capital appreciation per year, will be worth more than R2 million.
So, for an affordable monthly investment for only three years, ordinary South Africans can acquire a buy-to-let property that will be worth R2 million in 20 years, and will generate an ongoing, passive and inflation-linked monthly income for as long as the property is held.
Depending on the investor's income needs at retirement, it may be necessary to acquire, say, three buy-to-let properties over the next nine years. If so, at retirement, the investor will own three fully paid-off properties valued at R6 million in total, and producing a combined total income of R52 500 per month after expenses.
Dr Du Toit says you don't need qualifications or experience, or even much time, training or effort to implement this retirement plan. All that is required is the willingness to learn about an alternative to the traditional way of saving for retirement, which is in any case out of reach for so many of us, and to implement a tried-and-tested system for creating a financially-independent retirement, he says.