The property debate

Over the last three years, I have had a pretty heated debate on whether Property Unit Trusts (PUTs) are a better alternative for people looking to get into the property market than trying to buy property and 'flipping' them or using the rental income to pay off the bonds.

With the property market flying in the last few years, my views on PUT's have been shouted down. People have pointed out that they want 'real' investments where they can see the bricks and mortar.

Ja well no fine...

Now that the banks have tightened their lending regulations, PUTs have to be considered a real first option for getting into the property market. Consider this - if you want to buy an entry level property of R400 000 (REAL entry level) you need R40 000 - R80 000 in cash to put down as a deposit (assuming you don't do the 'personal loan' thing).

Not a lot of people trying to enter the market have that kind of cash available.

On a R400k bond you would be paying R 5469.72 on you your first property.... hhhmmm thinking back to my first property - that's a pretty tough pill to swallow.

(Especially if you are not deriving any rental income off it).

Now if you could take half that figure of R 5469.72 and were to invest it into the likes of Growthpoint or ApexHi - (Highly regarded property unit trusts listed on the JSE), you could buy access to properties like these featured in this blog. The pictures are of Constantia Park in Roodepoort and Fredman Towers in Sandton which form part of the Growthpoint portfolio.

No need to change light bulbs, fix toilets, fight with tenants for rent or have to do any of the credit checking - a professional team is managing it for you AND you pick up an after tax yield of around 6 - 8%.

Bear in mind that the biggest problem with 'buy-to-let' strategy is that many many players are buying on geared portfolios. Every month, they are paying a big chunk of their installment or rental income to service debt.

If investors are going to put money into a property portfolio, the PUT route may be a better starting point than extending themselves to buy property they can't afford.

Just a very quick sum to prove my point. If I take that montly installment of R 5469.72 over two years (24 months) I would have paid in R131273. The reality is that you would hardly paid off any of the capital amount after two years of paying in.

At the same time you'll be paying in say R1000 a month in water, rates, elec etc. so that figure increases to R155273. So basically your first R150k has returned nothing to you.

At the same time if I had invested that R 5469.72 into one of the PUTs I would have been cash positive to the tune of around R8000 at the same period (plus probably some capital gain in the units themselves...)

Might be something to bear in mind before young property investors go out there and over extend themselves?