Creating wealth through smart property decisions
ANY investors believe property should be seen primarily as an investment class and that it is better to rent a home and invest in numerous income-generating properties than owning a home that is not income-producing. Consider an average household. The family has saved R1 million to put down as a deposit on a property. They require a bond of R1.5m to acquire a family home priced at R2.5m. Their bond repayments are more than R15 000 a month and monthly rates another R2 500. So their home is costing them R17 500 a month, without the property generating an income.
If they had chosen to, they would be able to rent an equivalent home for R13 000 a month, resulting in a
Msaving of R4 500 a month. In addition, they could invest their R1m on income-generating properties. To this end, I would recommend buying one property for R1m cash, to generate a clean rental return. Alternatively, one could buy two properties valued at R1m each, gearing each one on a 50 percent loan to value ratio.
Consider the first option: remember that the lower the purchase price, the higher the yield. So while a property of R2.5m would generate a return of about R13 000 amonth (a 6.24 percent yield), a property priced at R1m could generate as much as R7 000 or R8 000 amonth (an 8.4 percent yield).
This means you should ideally rent your home and invest in cheaper stock because you would then benefit from paying a low rental at the R2.5m mark and earning a good yield at the R1m 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.
Now you are renting your home for R13 000 amonth and have invested your cash in an apartment with a good yield, earning R8 000 a month. After rates on your investment property have been deducted, you are clearing R7 000 a month. And you have saved R4 500 a month because your rent is lower than your bond instalments would have been on your home. So you are earning (saving) R11 500 a month and spending R13 000 on rent – having almost covered your entire rent and reduced your living costs right down to R1 500 a month. You also have a lovely investment property and are enjoying the same lifestyle you would have enjoyed because the value of the home you are renting is R2.5m.
From an investment perspective, the choice seems obvious: 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, a capital gains tax exemption is enjoyed when you own the home you live in. With investment properties, capital gains tax will apply, and any capital gain will be taxed at between 10 percent and 22 percent, depending on the nature of the legal entity owning the property.
It is also important to factor in the income tax that will be payable on the rental income.
Reynolds is the Pam Golding Properties area principal in Durban, Durban North and La Lucia. See www.pamgolding.co.za or call PGP KZN at 031 207 5584.