About Me

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I am a qualified Attorney. I specialise in Property Law, Commercial Law, Corporate Law and Trusts.
 
Please visit our website at www.prop-law.co.za for more details.
 
I am an elected Committee Member of the Property Committee of the Association of Pretoria Attorneys and through my involvement, I like to ensure that I am constantly at the "sharp-end" of Conveyancing Practice.

I am the elected Chairman on the Gauteng Council of SAPOA. The South African Property Owners Association (SAPOA) is the biggest and most influential institution in the property industry. SAPOA members control about 90% of commercial property in SA, with a combined portfolio in excess of R150 Billion (about $22 Billion). I am also on the National Council and the National Legal Committee of SAPOA.
 
Member of the Institute of Directors South Africa and Member of the Sirdar Governance Panel.

03 February 2012

The risk "less" investment option

The risk "less" investment option


Investments that allow an investor to manage and mitigate the risks involved.

While no investment is entirely without risk, there are investments that not only entail less risk than most, but also allow an investor to manage and mitigate - if not eliminate - the risks involved. A superb case in point is an investment in buy-to-let property.

Once an investor understands the very simple principles of buy-to-let property investment, it becomes clear that this is an investment alternative that poses far less risk than traditional investments. A brief overview of some of the main risks investors face when investing their hard-earned money will clearly reveal why a buy-to-let property investment is indeed a risk-"less" option, and will leave investors asking why they should ever invest in more risky investments to obtain far less impressive returns.

One of the greatest risks investors face is themselves, or "investor risk", as it is termed in financial circles. This risk refers to the fact that investors are often swayed by emotion - ranging from wild optimism to panic - which results in buying high, selling low, getting the timing wrong or abandoning long-term investment strategies in response to short-term market fluctuations.

"Property is an illiquid investment, which means it cannot be acquired or disposed of in a moment of panic of euphoria. When acquiring a property, the process of obtaining finance inherently requires financial scrutiny and bank valuations, which provides a built-in risk management mechanism. In addition, if investors take a professional approach to this type of investment, using proven step-by-step systems and custom-designed software, they can be absolutely certain that they acquire the right property every time," explains Dr Koos du Toit, CEO of P3 Investment Group. "A property is not simply sold on a whim, and obtaining valuations and offers prior to a sale provides the investor with some indication of whether selling is indeed the right option, or whether letting, subdividing, renovating or improving the property may yield a better return."

Of course, investor risk has been amplified by the extreme market volatility in recent times and there is little an investor can do to manage this risk. "Buy-to-let property investment, on the other hand, is far less susceptible to fickle investor sentiment and market volatility: property values and rentals don't simply plummet over night as share prices do. Although the economic conditions do impact the property market, people need a roof over their heads regardless of stock market movements or market crashes, and over the long term, rentals as well as property prices tend upwards regardless of economic conditions," notes Dr du Toit.

Related to the risk of market volatility is the risk of poor asset management. This is the risk that a salaried asset manager - to whom individual investors are no more than numbers - may make a poor judgement call and decimate their life savings. "The reality for investors is simply that no one will ever look after your hard-earned money as well as you do," comments Dr du Toit. "When you hand your money over to an unknown third party, you face a significant risk that you simply become a pawn in the big world of investment. A buy-to-let property puts the investor in control, able to conduct their own due diligence and to make their own decisions about where and how their money is invested: in brick-and-mortar, where they can see, touch and manage their investments.

"Of course, a buy-to-let property investor can also make poor judgement calls. However, this risk can be managed very effectively by tapping into a proven system, backed up by solid training and easy-to-use software, such as the P3 Investment System. It ensures every buy-to-let investment decision is thoroughly considered according to current variables and future performance, including cash flow projections and provision for vacancies, maintenance and other contingencies. Implementing such a system removes emotion from the investment decision and creates confidence that the investor has made the right decision."

The most prominent risk associated with buy-to-let investment is defaulting tenants. But this risk too can be managed effectively by appointing a professional and reputable rental management company for a reasonable monthly fee, to thoroughly screen tenants before placing them and to proactively manage the tenant. This, along with rental insurance, which will cover defaults and even evictions, providing excellent risk mitigation.

But perhaps the biggest risk any investor faces is inflation - the risk that the performance of the investment will not keep pace with inflation, eroding capital and leaving the investor with insufficient income to maintain his or her standard of living at retirement. "If an investment is not keeping pace with inflation, what is the point of investing?" asks Dr du Toit. "Buy-to-let property offers a built-in hedge against inflation, because the rental income produced by the property increases year by year, keeping pace with inflation. In addition to providing this ongoing, inflation-linked income, a buy-to-let investment property will also provide capital growth year after year."

For taking less risk, buy-to-let investors can expect an inflation-linked, passive annuity income for the rest of their lives, in addition to solid capital growth over the years. "It is these dual returns, produced despite the fact that property investment requires investors to risk less, which make buy-to-let property investment one of the best investment alternatives for South Africans who have been deeply disappointed by the performance of their traditional investment and retirement plans," concludes Dr du Toit.

* This report was prepared by P3 Investment Group

1 comment:

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