• Richus Nel, Financial Adviser, PSG Wealth

The realities of rental income as part of your retirement income

The COVID-19 financial market experience has unsettled even those most experienced in financial market investing. Records were set for all the wrong reasons; the S&P500 this time only took 16 days to fall into a bear market compared to 38 days in 1987 (including the infamous ‘Black Monday’) and 118 days for the Great Financial Crisis in 2008.

Various property syndications and physical investment property conversations re-emerged as all confidence has been shaken in the global and local financial markets. The marketing message driven home to potential investors, is that physical brick and mortar is somehow relatively immune to economic/financial market cycles. While investing in physical property perhaps provides a sense of comfort or security to investors, there are various aspects that are discussed less often than the “success stories” that are more often bandied about.

The reality of owning physical property

Mortgaged investment property makes a lot of sense. You receive capital growth and income on assets you would not otherwise have owned. Landlords often don’t share their horrid investment property stories with their friends, but they surely open up towards their financial advisers. Gardens and swimming pools neglected by tenants, to garage door issues, kitchen and bathroom maintenance, carpet and geyser replacements, leaking roofs, chimneys and sinking foundations, are just some of the stories I have heard. Anyone knowing their numbers can see that these unforeseen extras quickly dilute any form of investment profitability. South African landlords are mostly unprotected against non-payment, legal disputes, verbal abuse and (in extreme cases) personal safety concerns.

Market prices or value


According to the FNB Commercial Property Finance Team’s Property Insights (May 2020) we should expect an economic shock worse or equal to that of the Great Financial Crisis (GFC) 2008-2009. The percentage of tenants paying on time dropped to an unbearable 54% by the end of 2008. According to the FNB report, it took 3.5 years to recover tenants in “good standing” (paying on time) to pre-GFC levels.


Perhaps you think commercial property is different. The market prices of commercial property (selling prices and rentals) generally don’t initially adjust in line with the required “price equilibrium” (set by market supply and demand). However, the properties remain vacant for longer, and this too is obviously a devastating outcome for investment properties. Being forced to sell vacant commercial property during times of crisis mostly requires owners to severely drop prices to find a willing buyer.

“I have good tenants”

Many landlords argue that they “have been lucky with good tenants”. Everyone is (and feels) lucky, until their luck runs out. It would be rational to acknowledge that good tenants can also get retrenched and run out of financial options.

Unfortunately, there seems to be a remarkably close correlation between economic cycles and the buying/rental prices for physical property. This means that the risks in receiving your rental income, would peak during the same time when financial markets struggle to produce capital growth or receive dividend income. Diversifying financial market investment with physical property is therefore not a sound retirement diversification strategy.

The fundamentals of a sound investment strategy

Liquidity is one of the most underappreciated considerations in making investment decisions. Liquidity mostly only gets attention once it has dried up and assets cannot be sold. Physical property can experience profoundly serious liquidity challenges during times of crisis, both from a resale and rental income point of view.

Diversification during good times can be seen as diluting great returns from star performing assets. This feels true until the day most of your wealth is nested in a Steinhoff, EOH or Tongaat Hulett. Due to the value size of physical property, this asset class makes it quite difficult for the average investor to achieve effective diversification. Investment property is a business and with hundreds of examples of businesses that fail during crises, one needs to question if it really makes sense that your retirement plan rests on a handful of illiquid property assets or unpredictable income streams, even though these can be profitable.

Holding costs and taxes have, over recent years, dramatically increased for South Africans and global property-owners. Governments are capitalising on the dependable taxes levied on physical property, while labour fees have sky-rocketed. I recently paid R800 for an electrician (call-out plus half an hour’s time, no stock used). Landowners constantly find themselves being squeezed between rising ownership costs and stagnant national inflation-adjusted rental increases. The reduction in interest rates was a welcome interim relief and they should be taken full advantage of, as low interest rates will not be with us forever.