One of the most common financial fallacies that keep ordinary salary-earning South Africans from building real wealth is that investing is complex. This is not surprising, given the fact that the investment world is littered with jargon and technical terms such as risk tolerance, asset allocation, securitisation, hedging, offshoring, intrinsic values, liquidity, price-earning ratios, return targets, risk premiums, bulls, bears and bubbles.
Even if ordinary investors understand the terms, the intricacies of assembling all the pieces of the puzzle into a coherent and successful investment strategy may seem overwhelmingly complex.
Ordinary South Africans can hardly be blamed for avoiding investments and following Warren Buffett’s advice to never invest in something you don’t understand. This means leaving investment decisions to asset managers and financial advisors, which adds layers of fees that decimate their returns and places their financial futures at the mercy of volatile markets.
Fortunately, some of the most effective and efficient ways of investing your hard-earned money are also the simplest, and the best case in point is buy-to-let property investment. This investment alternative is used successfully by the world’s wealthiest individuals and companies, including the listed property companies and pension funds, owning vast portfolios of properties.
There is nothing complex about buy-to-let property investment: an investor acquires a property and rents it out to a tenant.
This not only creates an immediate and ongoing income stream that increases year after year, but also creates capital appreciation as the value of property rises year-on-year. Your money is therefore not invested somewhere in some complex or structured investment vehicle, but in brick-and-mortar, where you can see and touch it.
Ordinary salary-earning South Africans may not have a lump sum to acquire a buy-to-let property, but they can obtain a mortgage bond to buy the investment property. While no bank will lend you R500 000 to buy shares, a bank may give you a 100% bond on an entry-level buy-to-let property if you have a solid credit record and you are buying a well-located property in good condition.
Of course, the bond must be repaid along with other property expenses such as rates and taxes, levies, maintenance, insurance and rental management fees.
However, a well-chosen property in a good location with solid rental demand will produce sufficient rental income to cover most, if not all of these expenses. Any shortfall between the rental income and the total expenses should not amount to much more than what the average investor is investing in unit trusts or other investments already.
In addition, this shortfall amount decreases each year as the rental income increases, and within a few short years the rental income will exceed the monthly expenses. This provides a steady monthly income that grows exponentially once the bond is paid off, and a bond can be paid off in as little as 11 years.
Many investors are surprised to discover just how simple buy-to-let property investment is. You do not need to understand investment jargon or the intricacies of market dynamics. You do not need prior knowledge or qualifications, nor do you need experience, much time or even a lump sum to invest.
It is simply a matter of understanding a common sense strategy and implementing a proven system: acquire a well-chosen property, rent the property out to a good tenant, and then watch your relatively small investment grow into a passive, inflation-linked income stream for life. All the while also producing capital growth, providing you with multiple returns on a single, simple investment.
“Do not let the financial fallacy that investing is complex prevent you from building real wealth in 2015.”