Rent a home and then inv est in pr op­erty

Weekend Witness - - Mone Y -

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.

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