Rent a home and then inv est in pr operty
SOME r eal e state in vestors belie ve pr operty should be seen primarily as an investment class and that it is bet ter to r ent a home and in vest in numer ous inc omegenerating pr operties, as opposed to owning a home that is not inc omeproducing, said C arol R eynolds, P am Golding Properties ar ea princip al in Dur ban, Dur ban North and La Lucia. Consider the situation. A f amily has sa ved R1 million f or a deposit. They then r equire a bond of R1, 5 million t o acquire a solid family home priced at R2,5 million.
Their bond repayments are over R15 000 per month and their rates another R2 500 a month. So their home c osts R1 7 500 per month.
If they r ented, they c ould r ent an equi valent home for R13 000 per month. T his would save R4 500 a month. In addition, the y could invest their R1 million on incomegenerating properties.
“I would r ecommend pur chasing either one property for R1 million cash, to generate a clean rental r eturn. Alternatively, one c ould purchase two properties at R1 million each, g earing each one on a 50% lo an,” said R eynolds.
“While a property of R2,5 million would generate a return of R13 000 per month 6,24%[ yield], a pr operty pric ed at R1 million c ould g enerate as much as R7 000R8 000 a month [8, 4%].
You would then benefit from paying a low rental at the R2, 5 million mark, and earning a g ood yield at the R1 million mar k.
To return to our example, you are now renting your home for R13 000 per month. You have invested y our cash in an ap artment with a g ood yield and ar e earning R8 000 per month.
After your rates on your investment property have been deducted, you are clearing R7 000 per month. In addition, y ou have saved R4 500 per month because your rent is lower than your bond instalments would ha ve been on y our home. But ther e ar e some f actors t o c onsider. Firstly, there is a capit al gains tax exemption when y ou o wn the home that y ou li ve in.
With investment properties, CGT applies, and capital g ains ar e t axed at 10% t o 22%.
Secondly, if y ou enjo y up grading y our o wn home, r enting can be frus trating, as y ou don’t have the freedom to renovate. — Business Editor.