ENTITY
Ensure that when you make a property investment choice, you have the correct structures in place. Your choice of entity will have long-term influence over the longevity of your investment portfolio – during and beyond your lifetime.
There are many schools of thought on entities. When considering which vehicle to use, consult a professional i.e. tax and trust specialist. Ensure that you have a fair understanding of:
- How to protect your assets
- How to manage your investments tax-efficiently
- The benefits of estate planning
- The implications of estate duty and capital gains tax
If you opt for a trust, have a trust specialist structure your trust deed, followed up by an annual assessment to ensure you are up-to-date with trust & tax law, which changes regularly. Appoint a trust accountant, as not all accountants are experts in trusts. Ensure you have a selection of trustees that holds up under scrutiny in a high court and that it is not possible for the high court to ascertain that any particular trustee has majority control over the assets within the trust. If there are only 2 trustees, avoid these being related and if possible, have at least one trustee in an advisory capacity.
If you’re speculating in property, there is the option to purchase the property in your own name, saving on transfer costs and capital gain’s tax. However, any capital gains will then be in your own name. To place these gains into an entity, you need to create a loan account between yourself and the entity and the loan account is unprotected from creditors.
EXPOSURE Top
High risk and imprudence should never be encouraged. You can never avoid all risk and should strive to investigate and manage risk. Be well informed & financially prepared, with a “buffer fund” to assist you with unforeseen hurdles i.e. interest rate fluctuations and defaulting tenants. When times are tough, R50 000 to R100 000 available in a mortgage bond can be of great assistance.
ATTORNEYS Top
Select an attorney firm who will be able to assist you with all your transfer & bond registrations, as well as give you “free” advice when you need it. You can negotiate upfront for a regular discount on your bond & transfer costs, which is usually based on the amount of business you give them. If a discount is given, support the attorneys by referring other business to them (without the discount attached!) so that your attorney is also rewarded.
BOND CONSULTANTS Top
Select an experienced and effective bond consultant to assist you with each and every bond application. Do not compromise on your freedom of choice, or you will compromise your entire property portfolio. Many developers insist on you using their nominated attorneys and bond originators.
If you choose to use your own bond consultant, it is common that you will then be facing additional bond registration costs, and sometimes even transfer costs. It is a difficult choice, however those clients that opt to rather pay the additional costs and retain their regular bond consultant are positioning themselves for a higher success rate with bond applications, compared to those who sway from originator to originator depending on who’s insisting. An efficient bond consultant, who has your best interest at heart, should be monitoring your property portfolio and debt exposure. Your choice in bond consultant is as important as your choice of entity.
LIFE INSURANCE Top
Life insurance is highly recommended for those who use mortgage bonds to purchase property. If you’re a cash buyer, you might not require life insurance, as you’re already financially well established. However, for the rest of us, if we were to pass on, it would be very unfair to leave to our beneficiaries a property portfolio that is mostly bonded.
You don’t want your family having to worry about finances when you’re no longer around, nor to be given no option as to whether they wish to continue with your particular property investment strategy. Life insurance provides choices & breathing space for your family, and it is a fairly affordable safety net considering the benefits your beneficiaries and family will receive.
KNOWLEDGE IS KEY Top
Allow your beliefs to give you limitless perspective. Challenge your cynicism, fear and greed. Attend property investment courses, subscribe to newsletters, read books on property investing and take in as much knowledge as you have appetite for. Expand your knowledge to other key areas – accounting, success skills, motivation and business management. Investing in your own knowledge is the key to successfully investing in property.
YOUR ESTATE AGENT Top
Don’t hop from one agent to another. Establish a relationship with your agent of choice and put all your business through them. In return, you will be ensured absolute loyalty and excellence of service. Remember they have their ear to the ground and when fantastic new opportunities come along you want to be first on their contact list.
It costs you nothing to do all your business through your selected agent and establishes you as a buyer of integrity and credibility. Many sellers sometimes have an option of more than one buyer and will rely on the agent’s perspective to make a final decision on investment partner.
PROPERTY MANAGEMENT Top
Outsource your property management if the mundane duties of being a landlord, such as fixing toilets , replacing geysers etc., is a discouraging factor of investing in property. Generally, management fees are 10% of your rental income, and if you have a substantial portfolio you could negotiate on this rate. Generally, you should try and match the size of your portfolio to the size of the company you appoint. The smaller companies are usually very effective and provide excellent service to smaller investors. Even consider spreading the load between different agencies.
Read the article on Professional Property Management for more info
TO SELL OR NOT TO SELL Top
If you can afford to hold onto your properties, do so, regardless of the property cycle. However, if your property portfolio is threatening your financial stability, then it would be prudent to consider selling. Just remember, that there will be costs to acquiring these investments again - transfer duty & legal costs etc.
The property market to date has shown that it will always recover. That is what’s so great about property – it’s the most forgiving asset. Would you necessarily lose your property if the property market had to go into recession? Will you necessarily get less rent? In all likelihood, with the negative turn in the economy, your rental income would most likely increase because many people wouldn’t be able to afford to buy their own place and therefore the demand for rental properties would increase.
If you purchased with the intention to sell at some stage, then in conjunction with your agent, carefully assess the current market conditions before making a decision.
CASH FLOW CONSIDERATIONS Top
It is difficult to find cash flow positive (where the rent is covering the bond & holding expenses each month) properties from the outset in today’s market. If your property is not cash flow positive, structure & implement a plan to turn your property into a cash flow positive in 2 years or less.
Some suggestions on how to make your property cash flow positive:
- Change the use of the property i.e. holiday letting generally pays higher.
- If there are many unused bedrooms, sublet
- Students are generally subsidized by the government or their parents pay their rental, so if you have rooms big enough for a student’s bed & desk, target that market and you can easily get up to R6,000 for a 3-bedroom flat.
- If it’s a large property, you might be able subdivide and rent out the sections separately or sell a subdivided portion which could pay for your retained portion in full.
- Consider rezoning the property for business/commercial rights.
TAX CONSIDERATIONS Top
While you own your property, you are inevitably getting capital growth. In many instances, making little or no profit on the investment property is not a problem. You are gaining in capital value and will only end up paying capital gains tax when you sell – which is minimal.
The SA Revenue Service views investments differently for those making ad hoc investments to those who are recognised as property investors making their money from this source.
You could substantially increase your returns by wise tax decisions and it is therefore vital to get professional advice once you become a serious investor.
IN CLOSING Top
If you are prepared, there will be few surprises with investing in property. For true financial independence, it is important to be in control – of your assets, your cashflow and yourself.
Property investing can be dynamic, offering great financial opportunities. However, you need to take action. Before you leap in with both feet, take a few moments to ponder on the above advice, a week to plan, a month to set indestructible structures and a life-time to reap the benefits.
Why not call us today to begin your planning process?
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Property Investment Advice from Professionals
Key Considerations in Investing
Investing in Commercial Property
Rental vs Buying
Professional Property Management
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