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Can investment properties enable you to retire?

Can investment properties enable you to retire?


The recent FNB Retirement Survey reveals that at least 8 out of 10 surveyed South Africans plan to continue working past retirement age due to a lack of retirement savings, and of those without a retirement plan, at least 4 out of 10 will rely on selling assets or government social grants.

One of the best ways for the average person to generate wealth, which could assist with living costs post-retirement, remains property. While a home can be sold to help fund retirement goals, an investment property, or even portfolio of properties can do much more, and faster.

David Jacobs, Gauteng regional manager, Rawson Property Group, Jacqui Savage, national rentals manager, Rawson Property Group, and Antonie Goosen, principal and owner of Meridian Realty share their insights into what makes an ideal investment property.

Make the most of the rental market

Goosen shares that many people are currently opting to rent due to rising interest rates and the current economic climate. He cites TPN’s latest Rental Monitor released in May 2023, which indicates that the third and fourth quarters of 2022 saw rental escalations increase from a national average of 3.02% to 3.56%. The report goes on to say that “property owners can expect rental growth to continue its upward trajectory in 2023 and 2024 if interest rates remain high”.

The report details how rising interest rates “act as a deterrent to home ownership” with an increasing number of households choosing to rent, increasing demand for rental stock, and ultimately driving rental escalations. The report points out that as of Q4 2022 higher rental brackets are seeing enhanced rental growth. “Properties with rentals of more than R12 000 a month are seeing escalations of 4.38% followed by rentals between R7 000 and R12 000 per month which are growing at 4.16%. The lower end of the rental market – properties priced at between R3 000 and R7 000 per month – escalated at 3.2% while tenants paying less than R3000 per month saw escalations of 3.33%.”

What are the key factors to consider when purchasing an investment property?

Generally speaking, the income-to-cost ratio is better on sectional title properties. Freehold properties might rent for higher amounts,” says Jacobs, “but they require constant maintenance to achieve the standards that tenants expect for the price they pay. Sectional title is easier, since you only need to maintain the inside of your unit, but you do need to make sure you buy into a development with a good record for spending your levies wisely.”

Jacobs mentions that another thing to consider is who your tenant base will be. Smaller units will most likely be let by younger people, so you have to look at area amenities such as schools, and shopping centres in the area.

Regardless of the suburb or property type people choose to invest in, the experts all agree that a thorough knowledge of the local market is vital for success. Compare purchase prices carefully, ask about capital appreciation trends in the area, and always have a professional rental evaluation done prior to making a purchase.

What sort of price range is a ‘safe’ bet for a starter investment property?

In terms of price range Jacobs advises that it depends on the area, but for a starter investment, it is obvious to go for something in the lower range. “I would say in the northern suburbs and eastern suburbs of Gauteng, stretching to the west a good starting investment is between R852 000 and R1 million.

He advises doing a very good price comparison, which is easier to do with a sectional title unit, as the units in a complex are very similar in terms of building structures and plans. Comparisons on freeholds are a bit more difficult because you don’t know what the other properties look like inside, their plating structure, and their property size.

He notes that investors will need to fork out more in the Western Cape and even the South-Eastern Cape, which is currently very popular, so again, it pays to know the local market.

Would you recommend that buyers bring a letting agent on board to manage the property?

“Managing a property yourself is not only extremely time-consuming,” Savage explains, “but requires a great deal of knowledge of some quite complex laws and regulations put in place by the Rental Housing Tribunal. South African law tends to err on the side of protecting the tenant, not the landlord, and if your contracts and communications with the tenant don’t fall 100% within the rules from day one, you can quickly find yourself on the wrong end of an expensive dispute.”

Costs are the other main issue raised by landlords considering the services of a rental agent, and many question whether the time and effort saved are worth the extra expense. “What landlords might not realise,” Savage explains, “is that part of the rental agent’s responsibility is to run your property in the most efficient and profitable way for you. With the right tenant management, maintenance, and rental escalations, your property will generate more income under a good rental agent than it would under your own care.

Add to this the decreased likelihood of non-payment and subsequent litigation costs, and that small monthly agent fee suddenly seems like a very good deal!” All signs certainly point towards using a rental agent for your investment property but, should you have any doubts, Savage recommends talking through your options with a few short-listed candidates. “Ask all the questions you need to and take your time making a decision. The right agent makes all the difference, so make sure they tick all the boxes you need to feel completely comfortable and confident in their skills and dedication.”

Understand the tax implications of an investment property

Goosen states that buying to rent can be a rewarding venture, providing passive income and potential appreciation in property value. He says, “There are various aspects of tax on rental incomes to consider when you (investors) are deciding to invest.” He says one of the most important things an investor must consider when looking at deductions is the type of ownership of the property. He also says there are strategies that investors can implement to ease their tax burden and rental income.

The fact of the matter is rental income is subject to taxation and should be declared alongside other taxable income sources, such as salaries, wages, or dividends. The tax burden depends on how investor’s structure the property ownership, whether it be personally, through a trust, or via a company.

Personal ownership means that net rental income after allowable expenses is added to your personal taxable income, potentially pushing you into a higher tax bracket. Purchasing a property through a trust can protect assets and offer tax benefits. Rental income generated by the trust may be taxed in the hands of the beneficiaries, potentially lowering the overall tax liability. Comparing personal income tax rates and corporate tax rates is essential when using a company to grow property portfolios. As a shareholder receiving dividends from a company, the effective tax rate of the rental income could be up to 40% after corporate and dividend withholding tax.

SARS allows property owners to reduce their tax liability by claiming deductions for certain expenses incurred during the property rental period. Some of the deductible permissible expenses include:

  • Rates and taxes
  • Bond interest
  • Advertisements
  • Agent fees
  • Homeowner’s insurance
  • Garden services
  • Repairs and maintenance
  • Security and property levies

However, deductions should be proportionate if only a part of the property is rented out. Furthermore, improvement costs (as opposed to repairs and maintenance) are not deductible but can help lower capital gains tax liability when selling the property.

Goosen says, “There are three key strategies I would encourage investors to follow to get the most out of their investment. First get professional advice, second do not try to skirt any of your obligations to SARS as a buy to rent investor, third, if you have evaded tax consider the Voluntary Disclosure Programme (VDP).

Consulting a tax specialist before renting out a property can provide a clear understanding of deductible expenses and potential tax liabilities. This knowledge will enable investors to make informed decisions about their rental property investment.

SARS recently emphasised the tax obligations of investors receiving rental income from hosting fee-paying guests. It is essential for investors to declare this income and claim appropriate deductions to avoid falling afoul of tax regulations. Non-compliant taxpayers may face audits, additional tax assessments, and penalties of up to 200% on the additional tax. Investors who have not declared rental income can regularise their affairs by applying for voluntary disclosure relief with SARS. If approved, only additional tax and interest will be imposed, avoiding penalties.

“Navigating the complexities of tax on rental incomes is essential for property investors looking to maximise returns on their investments. By understanding the tax implications, potential deductions, and the importance of compliance with SARS regulations, investors can make informed decisions and avoid unnecessary tax burdens,” says Goosen.

With rental income a viable investment option in the current economic climate and all facts pointing toward a rental boom, building wealth through property investment is an achievable goal. Connecting with the right property professional with deep property, market and tax knowledge can reduce the risk of buy to let property purchases. With all the necessary facts on hand and all tax implications being carefully considered, rental income can prove fruitful for property investors in South Africa.

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