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Good time to invest in SA property

A weak global economy also adds to our woes, and this doesn’t seem likely to change soon. But, while many consumers are becoming more careful as to how they spend their money and taking on new debt, there are those whose finances do allow them to take advantage of investing in property.

Property is also one of the few investments that yield a return while your investment grows in value. A simple example would be the purchase of a residential property for R1 million, generating R8 000 rental income per month, which means that your return on the investment is 9.6 percent per year. What’s more, the property itself might be worth R1.2 million in two years’ time, which translates into a capital growth of 20 percent.

Johan Swart, Tax Manager at Legal and Tax, says now is the right time to get into the property market. He says currently the supply of property in South Africa is greater than the demand, which means that there are plenty of good deals. He says for those who do find themselves in a buyers’ market and who are in a position to see the slump through, it is no longer a matter of whether they should buy or not, but rather what to buy before the balance shifts in favour of the sellers again.

Property is also one of the few investments that yield a return while your investment grows in value. A simple example would be the purchase of a residential property for R1 million, generating R8 000 rental income per month, which means that your return on the investment is 9.6 percent per year. What’s more, the property itself might be worth R1.2 million in two years’ time, which translates into a capital growth of 20 percent.

Currently, many developers are sitting with too much stock and they are lowering their prices to offload the properties. However, it’s important to do one’s homework first.

Swart shares a few pointers:

– Ask the banks for a list of their repossessed houses and keep your eyes open for houses going on auction as this can offer a tremendous bargain.

– You may also look at buying a house that needs some renovation, but be careful here and get an expert to give you a good indication of what it will cost to turn a major renovation project into your dream home.

– Don’t be blinded by a low price – you still want to make sure that you are buying a good investment.

– Always look at the crime statistics of the area you intend to buy in, as this will have a direct impact on the value of the property you invest in.

– Maybe consider the growth shown in the coastal regions or the fact that inner city real estate has tripled in value in Gauteng.

– When buying an apartment, note that the smaller units appreciate in value the fastest, and earn the best rents in relation to the capital outlay. For example, two R1 million units will probably give a better return than one priced at R2 million. With one unit, the risk is focused and concentrated on a single tenant but spreading one’s risk is one of the oldest and wisest investment strategies and has always been favoured by landlords.

Tax implications when investing in property

Always remember that all income must be declared to SARS, and is subject to income tax, including rental income. The important factor with owning an investment property is that all expenses are, however, deductible from the rental income, before tax is calculated – this includes interest on the bond, repairs, maintenance, levies and rates and taxes.

Should this place you in a loss situation, as it is likely to do for the first five years if you bought the property utilising a bond, SARS handles the loss in two ways.

Firstly SARS can, and in most instances do, deduct the loss from your total income at year end, before calculating your tax liability on your assessment. This makes a property investment even more attractive.

Secondly, and if you are a top tax bracket income earner, SARS will ring fence the rental loss. That means the losses will only be deductible from future rental income, instead of being deducted from any other source of income like your salary. But, this is still not a bad business proposition because it means that you’ll not be earning a taxable rental income for a few years.

Property held in a trust

The primary motivation for holding a property in a trust should be for the protection and preservation of the property. Whether you want to protect the property against future financial threat or preserve it for your children, the motivation should not be because of any tax advantages, although as the current tax law stands, there may be a tax advantage.

The tax treatment of rental income received by a trust is the same as for any other tax entity. The advantage would be the distribution of the income. One of the basic rules of a trust is that the creator cannot be a beneficiary; for example, when a parent would put a rental earning property into a trust for the benefit of his four children. The tax benefit is that instead of the parent getting taxed on the full rental, each of the children will be taxed on a quarter of the rental after distribution from the trust.

The downside of a trust is that it comes with onerous compliance issues – these include the appointment of trustees, annual financial review, and technical tax issues that will in most instances require professional assistance. There are also tax implications to setting up the trust and transferring any assets like a property or money, from an individual to the trust.

The capital gains tax implication, should the property be disposed of, is also different to that of an individual, and the tax rate is higher.

Source: http://www.property24.com/articles/good-time-to-invest-in-sa-property/20518

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