Q: Are Shares not a Better Investment than Property?
A: These investment classes can both be crucial to an investment strategy. Shares are probably more an investment in people, and property in land, bricks and mortar. They are both affected by all the macro-economics of a specific economy. People need a place to stay and work, which is provided through property and the need for goods and services, which is provided by companies in which shares can be held. Throughout time there has been exceptional share investments and exceptional property investments. In a recent Forbes magazine it was stated that 90% of America’s wealthiest made their first money in property. This would probably be due to the ability to use gearing in property more so than in shares.
Q: I’ve Owned Property all my Life and I’m not Wealthy?
A: An issue which is comprehensively covered in “Rich Dad, Poor Dad” by R. T. Kiyosaki, is that the property you live in, even if you own it, is not an asset. Although it is beneficial to peg the cost of the asset in which you reside, only in exceptional circumstances is it an investment but most of the time it’s a lifestyle cost. By spending R2 million on a house based on area is not actually as wise as buying a R500 000 house to live in and spending the other R1 500 000 on real investments (i.e. receiving rent plus capital growth). A very common mistake is to pay a premium on a ‘new’ area and sell your current home because it’s not in a great area anymore. This investor is not only selling low, but also buying high which are both investment errors. If money is made on a sale of a home, this money is always used to upgrade so real profits are never realised. Money is rarely made on the home you live in, but rather on all your subsequent properties owned.
Q: What About Capital Gains Tax (CGT)?
A: The first irony is that people sell their second properties to invest in shares. As rental in property is generally higher than dividends in shares, shares are more reliant on capital growth and therefore more affected by CGT. In South Africa the highest effective CGT rate for individuals is 10%. The highest income tax rate is 40%, yet people still ask for an increase in salary. The point I am making is the second irony that people don’t seem to want to make R100 000 ‘passive’ profit because they have to pay R10 000 tax. It is a bit like having the cart before the horse.
Q: Is the Golden Rule still Location, Location, Location?
A: This makes for a hot debate! We’ve always felt that if there is a good area to buy in, doesn’t the seller know this and charge a premium? Just as in shares, where there are always shares in a particular industry trend that do the opposite, property in ‘good’ areas can possibly be overpriced. A crucial element to our selection criteria is price! If the average house in a good area is R1 200 000, and you pay R1 500 000 you may have overpaid, and if you bought for R400 000 in a bad area where the average price is R600 000, it may be a very good buy!
Q: For Tax Reasons – Should I buy a Car?
A: In South Africa especially, this is a very common mistake. By spending an extra R100 on a car, you may save R30 tax after private use, but is the net R70 well spent? Cars are too frequently bought for social reasons and not for simply getting from A to B.
Q: What are the Tax Implications of buying Property?
A: Capital Gains Tax (CGT) to a maximum of 10% for individuals is paid on the capital profit when the asset is disposed of. Rental income is taxed at marginal rates after taking deductions into account. Deductions include interest on loans, levies, collection fees, rates and taxes and repairs and maintenance.
Q: What are the Risks Involved?
A: The main risks are rental defaults and interest fluctuations. The crucial factor here is to manage the risk elements and not avoid them. Without risk, an investment could purely not offer adequate returns.
Q: Is Investing in SA Feasible?
A: It’s amazing that MacDonalds and Virgin with all their research analysts find South Africa feasible, yet many local residents do not. In 1994 white South Africans expected civil war and communism. These expectations were largely based on a total ignorance of the black population. In 2006, we have no civil war, although many all over the world and the country is surely richer than it’s ever been, it’s just much more spread – although there is still much room for growth.
In terms of 15 years ago, selling goods to the black population with them being unable to compete for your job, does not make the S A previous economy a free market in the least. If in 1994 we predicted our country in 2006, no one got it right. Three million people have received electricity in the last 5 years – surely the biggest growth period ever in this department. With everyone having equal opportunity and access to equal education, people are surely not convinced that crime will escalate or that living standards will generally reduce. South Africa has a huge emerging middle class.
Q: Why deal with Sirius?
A: The most crucial aspects to investing in property would be to remain unemotional when purchasing property and effectively managing tenants. This is where Sirius, with its invaluable expertise is able to –
§ A Source and facilitate the property purchase
§ B Assist in bond finance arrangements
§ C Provide the required surety through assurance
§ D Secure on going management of tenants
§ E Compile relevant tax disclosure.
The reason our client’s find that one is generally not enough is the better we buy and the more rent we get, the quicker they buy again. They know this and so do we that’s why it keeps working.
Come aboard – You won’t regret it!
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