Buy-to-let investments offer low risks

All investment experts will agree that it is crucial for investors to understand their risk profile or risk tolerance to ensure appropriate asset allocation.

One of the greatest investment pitfalls most investors face is their own human nature, which in financial circles is referred to as "investor risk". It refers to the fact that investors are often swayed by emotion, ranging from wild optimism to sheer 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.

This is according to Dr Koos du Toit, CEO of P3 Investment Group, who says to 'know thyself' and understand your risk profile, you need to consider a number of issues. For example, why you are investing, how well you understand investments, how experienced you are as an investor, how much of your money you are prepared to lose and what returns you need to fulfil your financial goals.

He says while there are investors who understand the world of investments well, who are experienced and are willing to risk losing some of their money in the hope of achieving higher returns in the long run, most South African investors have a fairly simple risk profile: they want to achieve good capital growth so they have a valuable asset in the future and a legacy to leave their children.

These investors need a sufficient ongoing income in the future to retire financially independent in their golden years, however long their retirement may last, and they need to protect their money from the ravages of inflation, he says.

“Few ordinary investors can tolerate, or even afford, to lose money on their investments. Yet, they require high returns to meet their financial goals with limited monthly investments, and most often, limited time.”

He says to achieve this, investors need to look for low risk investments that produce high returns. “It is not a solution that can be found among the traditional investment instruments that require investors to take high risk for, hopefully, high returns.”

Dr du Toit says to achieve high returns with low risk, investors need to turn to an investment alternative used by the world's wealthiest individuals and companies, including listed property companies and pension funds, and can be implemented quite easily by ordinary investors.

This investment alternative is buy-to-let property. By implementing the same model used by listed property companies, investors acquire a buy-to-let investment property and rent it out to a tenant.

The monthly rental provides an immediate and ongoing monthly income, while the property itself produces ongoing capital growth year after year.

The rental income keeps pace with inflation year after year as the rentals escalate each year, while the long-term capital growth also provides a solid hedge against the ravages of inflation.

The dual returns from the monthly income and capital growth produce the high returns most investors require, while buy-to-let property offers a low risk investment, as all the risks associated with this investment can be managed, if not eliminated, by implementing cost-effective and tried-and-tested risk management strategies, such as taking out rental insurance, to name just one, he says.

Furthermore, the monthly income and capital growth will continue to accrue for as long as the property is held, and if the property is acquired in the right structure, such as a trust, this could be for generations, creating a legacy of wealth for children and grandchildren.

Dr du Toit says should investors not have a lump sum to acquire a buy-to-let property for cash, they can obtain a mortgage bond. This is known as gearing, and it significantly increases the returns on the investment, as the investor's out-of-pocket investment is substantially reduced.

Investors following this option simply sacrifice the immediate rental income for a few years, using this income to cover the bond repayments and other property expenses, until the rental income, which increases each year, exceeds the monthly expenses and the property starts to produce a monthly profit.

This monthly profit increases each year, but grows exponentially once the bond is paid off, which can be done in as little as 11 years. And, during this time, the property continues to produce capital growth.

"Understanding your own risk profile and your personal tolerance for risk is one of the most important aspects of successful investing.”

Thereafter, investing is simply a matter of choosing the investment alternative that ticks all the boxes, he says.

“For the majority of investors who know themselves to have zero tolerance for losing their hard-earned money, and yet require high returns, good capital growth, a consistent and growing passive monthly income, a solid hedge against inflation and a legacy for future generations, buy-to-let property is a solution unmatched by other investment alternatives and can be implemented quite easily by following these steps."