Should I use my severance and preservation funds to buy a rental property for income?

Résumé détaillé

Given that you are looking for work, I would be reluctant to convert your current liquidity into an illiquid property at precisely the point you may need it most.

I’ve been unemployed for a year, and my UIF payments are ending soon. I have about R200 000 left from my severance package and R800 000 in a paid-up preservation fund. It’s been suggested that I use this to buy a rental property to cover my monthly expenses of around R9 000. Would this be a sensible approach?

I would be very hesitant to use both the R200 000 you have left from your severance package and your preservation fund to buy a rental property.

The main concern is not whether property is a good or bad investment. It is that you are currently unemployed, your UIF is coming to an end, and these assets appear to represent most of your available financial capital.

In that situation, liquidity and flexibility are particularly valuable.

Your monthly expenses of about R9 000 amount to R108 000 a year. On a R1 million property, you would need a gross rental yield of 10.8% just to generate R9 000 a month.

That is before allowing for rates, levies, insurance, maintenance, vacancies, letting or management fees, unexpected repairs and tax.

You currently have about R200 000 outside the preservation fund. At expenditure of R9 000 a month, that represents roughly 22 months of living expenses before allowing for emergencies or investment returns.

Given that you are looking for work, I would be reluctant to convert that liquidity into an illiquid property at precisely the point when you may need it most.

I would also think very carefully before withdrawing money from the preservation fund.

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