Finweek English Edition - - FRONT PAGE - BY GLENDA WIL­LIAMS

Buy­ing-to-let has be­come a pop­u­lar method of en­trepreneur­ship es­pe­cially for those who still pre­fer bricks and mor­tar to shares or cash as a way to grow their wealth or gen­er­ate in­come. So, if the prospect of own­ing not one but many prop­er­ties is not a daunt­ing one, you may be join­ing the ranks of many buy-to-let in­vestors who ac­tively pur­sue this as a busi­ness.

The prop­erty mar­ket is full of in­vestors who have dived into the boom­ing busi­ness of buy­ing to let. Not sur­pris­ing, as the pro­por­tion of house­holds who are rent­ing in­creases, thereby cre­at­ing op­por­tu­nity for en­ter­pris­ing en­trepreneurs to grow their prop­erty in­vest­ment port­fo­lios and their rental busi­nesses. But it is a busi­ness that, for the mis­guided or those look­ing for a get-rich-quick scheme, can just as quickly be tor­pe­doed by mis­man­age­ment, in­ter­est rate hikes or a mar­ket down­turn.

There are signs that eco­nomic pres­sures may cause the prop­erty mar­ket to take a hia­tus. Reg­is­tered credit bureau TPN re­ports that while 86% of ten­ants na­tion­ally are in good stand­ing, signs of weak­en­ing have started to ap­pear (see graph). Pre­dictably the cracks ap­peared in the up­per value bracket (R25 000 per month plus) where ten­ants in good stand­ing dropped from 81% in the first quar­ter of this year to 71% in the sec­ond quar­ter.

Cau­tion aside, peo­ple re­quire a roof over their heads and if ris­ing in­ter­est rates and lend­ing cri­te­ria re­sults in fewer peo­ple pur­chas­ing their own prop­er­ties, it stands to rea­son that rentals will con­tinue to be in de­mand. Ac­cord­ing to TPN cur­rently 61% of ten­ants rent prop­er­ties that cost be­tween R3 000 and R7 000 while 12% fall into the R7 000-R12 000 cat­e­gory.

But it is the level of de­mand that could change. The coun­try has been through a pe­riod where de­mand for good qual­ity prop­er­ties out­stripped sup­ply and it has also seen an over­abun­dance of de­vel­op­ments re­sult­ing in a glut of prop­er­ties avail­able for rent. If, dur­ing a slump, a sur­plus of rental prop­er­ties ex­ists, the costs to rent could ad­just. In order to re­tain or at­tract ten­ants whose wallets may be tak­ing strain, land­lords would in­vari­ably need to be­come more re­al­is­tic about the yields they ex­pect to gen­er­ate and freeze or even lower their rentals. Rentals for non-pri­mary res­i­den­tial ac­com­mo­da­tion like se­condary home rentals or hol­i­day lets are nor­mally the first to suf­fer in an eco­nomic squeeze.

Whether in an up­turn or down­turn, lo­ca­tion is key. The de­mand for well- lo­cated prop­er­ties is likely to fare far bet­ter than those in lit­tle-known ar­eas. Whether your prop­erty ap­pre­ci­ates or de­pre­ci­ates in value is typ­i­cally also aug­mented by lo­ca­tion.

Yet, many buy-to-let in­vestors who ap­proach t his method of prop­erty ac­quire­ment from a busi­ness an­gle may be un­aware of the tax ben­e­fits that could ap­ply to them.

A tax­payer who owns at least f ive res­i­den­tial units in South Africa, which are used by the tax­payer for the sole pur­pose of his rental trade, may qual­ify for a de­duc­tion of 5% of the cost of the units, says Dr Beric Croome, tax ex­ec­u­tive at ENSafrica. “Thus, if an in­vestor ac­quires at least five new and un­used res­i­den­tial units or erects five res­i­den­tial units cost­ing say R1m each – which do not need to be in the same place – and they let that out as part of their rental trade they would qual­ify for a de­duc­tion of 5% of R5m per an­num of the units owned and

let out,” he says. “The 5% an­nual de­duc­tion is al­lowed over a pe­riod of 20 years if the owner keeps the build­ing for that pe­riod and meets the re­quire­ments of the sec­tion.

“Clearly, if the build­ing/unit is sold, the al­lowances pre­vi­ously claimed are re­couped and any amount re­alised in ex­cess of the cost of the prop­erty sold will at­tract cap­i­tal gains tax where the tax­payer is an in­vestor in fixed prop­erty and not a dealer therein,” cau­tions Croome.

The de­duc­tion is a higher 10% if the units fall into the cat­e­gory of low­cost hous­ing, which are R300 000 for a stand-alone unit and R350 000 for an apart­ment. But, in terms of the In­come Tax Act, rentals for low-cost hous­ing are lim­ited to 1% of the cost of the unit or apart­ment, says Croome.

But the devil is in the de­tail and the al­lowance ap­plies to new and un­used build­ings ac­quired or erected. So, if a tax­payer ac­quires five ‘used’ res­i­den­tial units but then makes im­prove­ments to them, the al­lowance will then be based on the cost of the im­prove­ments ef­fected, not on the cost of the used res­i­den­tial units.

Even with the pos­si­bil­ity of a lull in the mar­ket there are scores of in­trepid en­trepreneurs who fol­low a path of cau­tious op­ti­mism and a long-term view and for which the buy-to-let mar­ket still holds value as a busi­ness.

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