select
|

Property wealth creation

Many real estate investors believe that property should be seen primarily as an investment class and hence, the view is that it is better to rent a home and invest in numerous income generating properties as opposed to owning a home that is not income-producing, says Carol Reynolds, Pam Golding Properties area principal in Durban, Durban North and La Lucia. 


Situated in Morningside, Durban, this immaculate three bedroom, two bathroom home incorporates a blend of modern finishes and colonial character. A lovely kitchen, complete with SMEG oven, opens onto the dining area which in turn flows onto a spectacular outdoor, undercover living area while the front of the home includes an attractive decked patio with sea and stadium views. Mediterranean shutters and down lighting are examples of the superior finishes that complete this exception home, which is marketed by Pam Golding Properties at R2.75 million.
 
She says to investigate this further, consider the situation of an average household. The family has saved R1 million to put down as a deposit on a property. They then require a bond of R1.5 million to acquire a solid family home priced at R2.5 million. Their bond repayments are over R15 000 per month and their rates are another R2 500 per month. So their home is costing them R17 500 per month, without the property generating an income for them. If they chose to rent, they would be able to rent an equivalent home for R13 000 per month. This would result in a saving of R4 500 per month. In addition, they would then be able to invest their R1 million on income generating properties.
 
Says Reynolds: “To this end, I would recommend purchasing either one property for R1 million cash, to generate a clean rental return. Alternatively, one could purchase two properties valued at R1 million each, gearing each one on a 50 percent loan to value ratio.
 
“Let’s consider the first option: remember that the lower the purchase price, the higher the yield. So while a property of R2.5 million would generate a return of approximately R13 000 per month (6.24 percent yield), a property priced at R1 million could generate as much as R7 000 or R8 000 per month (8.4 percent yield). This means that you should ideally rent your home, and invest in cheaper stock, because you would then benefit from paying a low rental at the R2.5 million mark, and earning a good yield at the R1 million mark. In other words, you want to benefit as a tenant from a low yield property, and benefit as an investor/landlord from a high yield property. This way, you score on both ends.”
 
To return to our example, you are now renting your home for R13 000 per month. You have invested your cash in an apartment with a good yield and are earning R8 000 per month. After your rates on your investment property have been deducted, you are clearing R7 000 per month. In addition, you have saved R4 500 per month because your rent is lower than your bond instalments would have been on your home. Thus, you are earning (saving) R11 500 per month and spending R13 000 on rent – you have almost covered your entire rent and reduced your living costs right down to R1 500 per month! Plus you have a lovely investment property and are enjoying the same lifestyle as you would have enjoyed because the value of the home you are renting is R2.5 million.


Priced at R820 000 through Pam Golding Properties, this two bedroom apartment in Essenwood on Durban’s centrally situated Berea is an ideal starter unit for a young couple who will enjoy the privacy of a top floor corner unit. Light and airy with attractive suburban views above the tree tops, the apartment includes a deck which can be accessed from the lounge and main bedroom. Located within a well-managed block with CCTV and with two parking spaces available, the property has drive-in and intercom access.
 
Reynolds says the other option is to purchase two properties and gear them. In this case, your asset base has automatically doubled, but you now have bonds. Each property generates a return of R8 000 per month – R7 000 after rates have been paid. Your bond instalments are approximately R5 000 per month. Thus each flat is paying for itself, and you have R2000 to spare on each one which can assist in paying towards your rent on your house. Thus, you have two properties that are paying off their own bonds, and you have an extra R4000 per month to contribute towards your monthly rent on your home. Your monthly costs are reduced to R9 000 and you own two apartments that are not costing you anything, with a value of R2 million.  
 
“From an investment perspective, it sounds like an obvious choice: rent your home and invest your money in income generating properties. There are, however other factors to consider that could impact upon this savvy business plan. Firstly, SARS encourages South Africans to purchase their primary residences in their personal names. Thus, there is a capital gains tax exemption that is enjoyed when you own the home that you live in. With investment properties, CGT will apply, and hence any capital gain will be taxed at between 10 percent and 22 percent, depending on the nature of the legal entity that owns the property.
 
“Secondly, if you are creative and enjoy upgrading and maintaining your own home, renting can be frustrating, as you don’t have the freedom to renovate and upgrade. In some instances, buying homes, living in them and then renovating and upgrading them can in itself be a lucrative business. Especially since there is a CGT exemption on any capital gain made as a result of the improvements.”
 
Concludes Reynolds: “In an ideal world, the perfect scenario would be to have enough capital to do both: own a lovely home that has potential for cosmetic improvements enabling you to maximise your profits on your primary residence; and then having sufficient funds to invest in apartments as a side-line wealth creation business. The best philosophy to adopt is to realise that your primary residence is both an asset and a lifestyle choice, whereas, your apartment portfolio is comprised strictly of investment properties which means that you will look at different factors when purchasing these properties.
 
“When doing the sums, it is also important to factor in the income tax that will be payable on the rental income. This will form part of your annual tax assessment and you will be taxed according to your tax bracket. Perhaps the second option, whereby two apartments are purchased - each with a bond, is the wiser choice as these two geared properties would result in less (if any) tax liability.”


  Comment on this Article

  Please login to post comments

Post to my facebook wall
  
2000
Characters remaining


    Latest Property News
    • 20 Apr 2018
      Whenever changes in the political ecosystem of a traditional property market create uncertainty, smart investors begin to look elsewhere for new opportunities. Property experts at IP Global have analysed the trends and crunched the numbers to find new markets to explore in Europe and the United States.
    • 20 Apr 2018
      Energy and water self-sufficiency are increasingly important factors in home buyers’ choice of property – especially in Cape Town where the extreme drought of the past few years has made municipal supply costly as well as uncertain.
    • 19 Apr 2018
      During the last decade, rampant development has progressively transformed Cape Town’s property landscape with densification being the order of the day, but there are still one or two hidden gems like Scarborough which have retained their original character, offering an inimitable lifestyle and an attractive investment opportunity.
    • 19 Apr 2018
      The rental market is a cut-throat sector of the real estate market that waits for nobody. According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, first-time renters need to be fully prepared before they even start the process of looking for a place to rent in order to avoid the disappointment of losing out on their ideal property.
    • 19 Apr 2018
      Choosing to buy your first home instead of continuing to rent is a big decision that will usually take some time to put into action, but the sooner you can save up a sizeable deposit, the closer you will be to reaching your goal.
    • 18 Apr 2018
      Selling your home is no small task and as you will quickly find out, there are a lot of misconceptions about the process. Gerhard van der Linde, Seeff's MD in Pretoria East lists the top 5 misconceptions when you are selling your home.
    • 18 Apr 2018
      The Cape Town municipality is now installing water-management devices at properties that have been non-compliant with the new level 5 water restrictions and there are talks of fines between R5,000 and R10,000 for households that use too much water.
    • 17 Apr 2018
      The recent interest rate cut has stoked the coals in the first-time buyer’s market. At least for the next two months until the next interest rate announcement, homeowners are guaranteed lower monthly instalments than in the previous quarter. But, is it wise to take out a 100% bond just to enter the property market while interest rates are low?
        
    X
    Subscribe to the MyProperty Newsletter

    Name  
    Last Name  
    Email Address  
    Email Frequency
    select
    X
    Share this Page

       
    For Sale Property
    Rental Property
    More Options
    About
    Connect with us
    FEEDBACK