Property Investments

Monthly Rental Income:
Monthly Rental Income is the rental income you receive each month. It can be increased each year by inserting a growth rate in Potential Rental Growth per annum.

Monthly Loan Repayment:
Monthly Loan Repayment is the value of monthly loan repayments.

Monthly Cash Operating Expenses:
Monthly Cash Operating Expenses is the total of the tax deductible expenses associated with maintaining the property for the month. It increases by the growth rate input in Annual Increase in Operating Expenses.

Cash Flow:
Cash Flow is the cash revenues less the cash expenses. That is Rental Income less the Loan Repayments and Cash Operating Expenses. This measures the amount of cash you will receive, if it is a positive number, or the amount you will have to pay, if it is a negative number.

Annual Tax Profit/Loss on Property:
Annual Tax Profit/Loss on Property combines the cash flow generated by the property with the tax deductions to determine the profit or loss for accounting purposes.

 

Investing in Properties

Why property?
Property has been a popular route to wealth for many South Africans for many years. Buying their own home is often the first investment many people make; purchasing another property may well be the second even before shares and other assets.

But your first investment in property need not be your home. Indeed, buying a small apartment to rent out can be a good way to accumulate funds so you can eventually buy your own place, in an area where you want to live.

Increasing numbers of young South Africans are choosing this route, buying in one suburb while renting in a more desirable and expensive area or living at home for a while longer.

Still others are diversifying into non-residential property via property trusts and syndicates.
Sensible investments in property have many attractions. Property can be less volatile than shares though not always and it tends to be regarded as a safe haven when other assets are declining in value.

It has the potential to generate capital growth (an increase in the value of your asset) as well as rental income. Then there is the tax advantages associated with negative gearing.
However, as with any investment, there are no guarantees. Property prices go down, as well as up, and sometimes tenants are hard to find especially good ones who pay on time and take care of your investment.

The housing market is generally a 7-10 year cycle; there are always highs, lows and steady patches.
Take control of your investment by being properly informed on property values, trends and what is happening in the home loan market.

Investors need to have a keen awareness of the interest rate environment how higher rates might affect their expected net return and the market for their property should they wish to sell. They also need to make sure the return or yield from their property stands up against the return they might have achieved had they invested in shares, for example.

The idea of owning rental property seems to be gaining popularity as investors tire of the ups and downs of the stock market. Not everyone has what it takes to be a landlord. But those who do may find rentals to be a good way to build wealth.

Once you've made the decision to buy rental property, your real work begins. Finding a profitable rental property usually takes time, connections and plenty of research.

Here's what you need to know to get started:

Know your time horizon
As with any other investment, you should have a good idea how long you plan to own a rental property before you buy it.

The longer you plan to own the property, the more you'll probably need to invest in maintenance, repairs and improvements.

"If you're keeping it for 20 years, at some point you're going to be putting a new roof on that property. You're going to be putting in new appliances and doing some major repairs,” If you're only planning to own a property for five years, by contrast, you'll probably want to avoid making any major improvements unless you're sure you can recoup the cost with a higher sale price.

You also may face more investment risk with a shorter time horizon. Although your rental will almost certainly appreciate over 20 years, it could easily lose value in the next five, particularly if you're buying in an overheated market. You'll need a bigger potential annual return to make up for that risk.

For many small investors, long-term ownership makes the most sense. You'll have plenty of time to ride out any swings in the market, and rental income can make a nice supplement to your day job. Find enough rental properties, and being a landlord may become your day job.

Develop a network
Experienced landlords find their properties in a variety of ways. Some hunt for foreclosures, making friends with city hall clerks or bank employees who know which properties are about to be sold. Some run ads in local newspapers. Others work with real estate agents who keep their eyes peeled for possible buys.

Several landlords recommend joining a local landlord or property owner's association to make contacts.
"When you begin to own rentals, all the other investors start coming out of the woodwork"
You also can try approaching landlords directly to see if they're willing to sell, by calling the numbers listed on rental ads in the classifieds, by cruising neighborhoods looking for "for rent" signs or by talking to any landlords you know personally.

Get your finances in shape
The better your credit, and the less credit card and other consumer debt you have, the better your prospects for getting a decent loan. Lenders usually require bigger down payments, higher interest rates and generally stronger finances when you're buying rental property. That's because they know people are more likely to default on investment property than they are on their own homes.

Landlords say it also pays to have a substantial cash reserve left over after buying a property. This can help pay for unexpected repairs and vacancies. Although there are few rules of thumb, setting aside at least one month's rent for each unit is a good start. Having a line of credit, secured either by the property or your own home, to cover larger costs is a good idea.

You also should make sure you can save enough for retirement and other goals before investing in rental real estate. While rental income can supplement your retirement kitty, most people shouldn't count on it to replace other investments or allow themselves to be entirely exposed to the whims of the local real estate market. Rents and property values can fall as well as rise, and those who are adequately diversified with investments in stocks, bonds and cash will be better able to endure the bad times as well as the good.

Avoid overpaying
As one experienced landlord put it: "You make your profit when you buy a property, not when you sell it." Pay too much, and you'll never recoup as much as you could have had you driven a better bargain.
The rental real estate market is generally tougher on investors who overpay than on homeowners who do the same thing, several landlords said. While a home is often an emotional purchase, which can lead to "I must have it!" offers and bidding wars, most landlords look strictly at the numbers to see if their investments will pay off. If you pay too much for a rental, you can't count on a "greater fool" coming along later to bail you out.

Not overpaying can be tough in a hot market. Some landlords use formulas, such as not paying more than eight times the rents they expect to make the first year. Others try to estimate what the property could be worth after needed repairs and upgrades are made, and they don't pay more than 70% of that price, less the cost of those repairs.

Every real estate market is different and these formulas may not work in your area. The key is to make sure your rental income will cover your out-of-pocket costs. That includes the mortgage payment on the property, as well as taxes, insurance, maintenance, repairs and a vacancy rate of around 5%. (If you have five units, for example, you should expect at least one unit to be empty three months each year. Here's the math: 5 units times 12 months equals 60; 60 times .05 is 3.)

If you can at least break even, you'll be able to profit from any price appreciation as well as from tax breaks available to rental property.

When crunching the numbers, you should know that there's a big difference in how repairs and improvements are treated for tax purposes. You can typically deduct the cost of a repair, such as patching a roof or fixing a leaking pipe. Instead, it's added to the amount you paid for the property to determine your tax basis when you sell. The higher the basis, the lower your taxable profit.

To better estimate your costs, get a thorough inspection before you buy a property. Some landlords have favorite electricians, plumbers and contractors that they send to any prospective property, promising them that they can do any repair work they find. Others use professional inspectors they trust.

Longtime landlords say all this work pays off in profitable properties that build their net worth while providing a steady income stream. It doesn't matter if you're a professional or a laborer, "It's the equal-opportunity wealth builder."

Capital growth and Equity
Capital growth is the increase in the value of your property over time and is one of the main reasons people invest in residential real estate.
Historically, South African residential property has experienced strong capital growth the long-term average annual growth rate for property is about 14 per cent but periods of stagnation and even decline are also part of the picture. The nature of the property cycle means real estate should probably be thought of as an investment with a 10-year horizon.
Take the experience in recent years. In 2003, South African house prices were rising at a rate of about 23 per cent (National), but since then prices have come to a virtual standstill in many areas and have gone backwards fast in some of the hot spots.
Your best chance of achieving capital growth is buying the right property, in the right place, and most importantly at the right price.
Research current house prices. Keep an eye on sale and auction results in the papers, or buy reports on specific suburbs. Talk to real estate agents and observe at auctions.

Consider using the equity in any other property you own.
Tapping into your home equity, or equity from another property investment, is a great launching platform for buying an investment property. Say your home is valued at R1,200,000, you owe R600,000 on your mortgage and you want to invest 10% of the equity (or R120,000) into another property. You can do so provided that you comfortably afford your repayments.

Rental income and yield
You should apply the same standards to a property investment as to any other investment, benchmarking the potential return against what you might achieve elsewhere.
An important measure is a property’s yield. That can be calculated by dividing the annual rent it generates by the price you paid for the property and multiplying that by 100 to get a percentage figure.
Lets say you bought a unit for R1,000,000 and rented it out for R78,000 a year. That’s a yield of 7.8 percent. That might compare with a dividend yield of, say, 8.5 percent had you invested in a particular company’s stock.
But let’s say you bought a workers cottage in a mining town where prices are low but the rental income as good as in the big city. Pay R700,000 and rent the property out for R85,000 a year and you’ll achieve a yield of 12 per cent.
Remember, yields fall as house prices rise (if rent doesn’t rise commensurably).
Keep an eye on vacancy rates, the proportion of properties sitting empty out of the total rental supply.
If landlords have to fight for tenants, they won’t have much pricing power with regard to rent. However, if the rental market is tight, and tenants are competing for properties, they’ll be prepared to pay a bit more to get in the door (supply and demand)  
A vacancy rate above 3 per cent is a warning sign, and it may pay to be wary of areas where there’s going to be a big increase in the supply of apartments.
In any case, build into your calculations of your likely return periods when you’ll be in between tenants.

Positive gearing
Positively gearing a property. This occurs when the investment income exceeds your interest expense (and other possible deductions). Note that you may be subject to additional tax on any income derived from a positively geared investment.

Negative gearing
Gearing basically means borrowing to invest. Negative gearing is when the costs of investing are higher than the return you achieve. With an investment property, that’s when the annual net rental income is less than the loan interest plus the deductible expenses associated with maintaining the property (such as property management fees and repairs).

When you’re negatively geared you can deduct the costs of owning your investment property from your overall income reducing your tax bill. High-income earners benefit the most, because they’re in the top tax bracket.

In addition, while you record a loss on the income from the property, in theory capital gains in the value of your property should make the investment worthwhile.

But don’t over-commit to property just to get a tax deduction. Those tax benefits generally don't come until the end of the financial year and you have to make your mortgage payments in the meantime.

Remember, that a capital gain which will be taxed is never assured. What’s more, the benefits of negative gearing are smaller when interest rates and inflation are low.

Capital gains tax
Capital gains tax (CGT) is the tax charged on capital gains that arise from the disposal of an asset including investment property.

You’re liable for CGT if your capital gains exceed your capital losses in an income year. (If you’re smart, you’ll time asset disposals so that if you really must take a capital loss it’ll be at a time when it can offset a capital gain).

The capital gain is the profit (equity) you’ve made over and above the cost base the purchase price plus capital expenses such as subsequent renovations. Make sure you keep good records of these sorts of expenses.

Capital gains tax is a complex area, so it pays to get specific advice about how it applies in your individual circumstances.

Fixed properties owned by the South African taxpayer are usually long term investments. In these circumstances the proceeds received from the sale of fixed property comprise capital receipts which are currently exempt from taxation.

As part of the ongoing program of tax reform in South Africa, Capital Gains Tax ("CGT") was implemented on 1 October 2001.

Who will pay CGT (Capital Gains Tax)?

 

When is CGT levied?

CGT will be levied on disposal of an affected asset. "Disposal" will occur where an asset is sold, donated, scrapped, exchanged, cancelled, lost, destroyed or redeemed, as well as where:

 

Are there any exclusions from CGT ?

It would seem that the fiscus does not want to recover CGT from an individual’s personal assets and residence. In addition to a basic annual Primary exclusion of R12 500, the inclusions and exemptions from CGT can be summarised as follows:

Exclude

 

Include

 

Note: The primary residence exclusion is of particular relevance to the individual taxpayer and the following concepts within the legislation should be noted:

 

What is the effect of CGT on the sale of a primary residence registered in the joint names of husband and wife?

As both would be considered to be taxpayers, the husband and wife could each benefit from their respective one and a half million rand abatement on their share of the capital gain. They would both have to live in the property, however, a husband and a wife could not have two primary residences.

 

UNDERSTANDING THE BASICS OF CAPITAL GAINS TAX

Introduction

In his Budget Speech of 23 February 2000 the Minister of Finance, Mr Trevor Manuel, announced the introduction of Capital Gains Tax (CGT) in South Africa. Internationally, such a tax is not uncommon, with many of our trading partners having implemented CGT decades ago.

Before the implementation of CGT, you were taxed on the ordinary income you earned from owning assets, but were not generally taxed on profits arising from the disposal of those assets. The effect of CGT is that all capital gains and losses made on the disposal of assets are subject to CGT unless excluded by specific provisions.

In order to give effect to the proposals relating to CGT, an Eighth Schedule was added to the Income Tax Act, 1962 (the Act). This Schedule determines a taxable capital gain or assessed capital loss and section 26A of the Act provides that the taxable capital gain must be included in taxable income. The date from which capital gains are taxed is 1 October 2001.

Should this guide not answer your specific questions, you should contact your local SARS office or make use of the e-mail facility cgt@sars.gov.za.

Do I have to register for CGT?
No, CGT will only be triggered on the disposal of an asset. The taxable capital gain will then form part of your taxable income and must be included in your Income Tax Return for the year of assessment in which the disposal occurred. If you had a capital gain or capital loss exceeding R10 000 and you are not registered for income tax purposes, it will be necessary to register as a taxpayer at your local SARS office for the year of assessment in which you disposed of the asset and to complete a tax return for that year.

 

IMPORTANT DEFINITIONS

What is meant by a disposal?

A wide meaning has been given to the concept of disposal. The following are some examples of events that will be regarded as disposals:
• The sale of an asset
• Donation of an asset
• The loss or destruction of an asset

What assets are excluded from CGT?
Certain assets (such as personal-use assets) are excluded from CGT. Some of the important exclusions to note are:
• A primary residence (the first R1 million of gain or loss).(See part 4 of this guide for a more detailed explanation of what a “primary residence” is and how it is affected by CGT.)
• Most personal belongings such as motor vehicles and caravans, which are not used for the carrying on of a trade, furniture, etc
• Currencies, but not coins made from gold or platinum such as Kruger Rands
• Boats not exceeding ten metres in length and aircraft the empty mass of which does not exceed 450 kilograms
• Lump sum payments from pension, provident and retirement annuity funds (approved retirement funds)
• Proceeds from an endowment policy or life insurance policy (unless it is a second hand policy)
• Compensation for personal injury or illness
• Prizes/winnings from South African approved competitions, for example, the National Lottery

What is meant by a capital gain or loss?
A person’s capital gain in respect of an asset disposed of is the amount by which the proceeds exceed the base cost of that asset. A capital loss is equal to the amount by which the base cost of the asset exceeds the proceeds.

Example of a capital gain or loss
Loss                                                 Gain
Proceeds R10 000                             Proceeds R10 000
Base Cost R20 000                            Base Cost R 5 000
Capital Loss (R10 000)                      Capital Gain R 5 000

What is the base cost?
The base cost of an asset is generally the expenditure actually incurred in acquiring an asset (what you paid for it) together with expenditure directly related to the acquisition or
disposal of an asset (e.g., sales commission – see Note below) or to improve the asset (such as the cost of capital improvements to the asset). The base cost does not include amounts which have been allowed as a deduction for income tax purposes.

 Some of the main costs that may form part of the base cost of an asset are:
• Expenditure to acquire the asset
• Transfer costs, stamp duty, transfer duty
• Advertising cost to find a seller or a buyer
• Cost of improvements to an asset
• Cost of the valuation of the asset for the purpose of calculating a capital gain or loss in respect of the asset
• Cost directly related to the acquisition, creation or disposal of that asset, e.g. fees paid to a surveyor, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered
• VAT paid and not claimed or refunded on asset
• Cost of establishing, maintaining or defending a legal title or right in the asset
• Cost of moving the asset from one location to another (on acquisition)
• Cost of installation of the asset, including the cost of foundations and supporting structures

Note: Where the time-apportionment method is used to determine the base cost of an asset as at 1 October 2001, selling expenses must be deducted from proceeds.

 

CALCULATING THE BASE COST

What is the base cost of assets held before 1 October 2001?

In order to exclude the portion of the gain relating to the period before 1 October 2001 you need to determine the value of the asset at that date. You may use one of the following methods to determine the base cost of the asset as at 1 October 2001:

a) 20% x (proceeds less allowable expenditure incurred on or after 1 October 2001) (where no records have been kept and no valuation was obtained at 1 October 2001)
OR
b) Market value of the asset as at 1 October 2001, which is called the valuation date. (In order to use this method you had to have your asset valued before 30 September 2004.)
OR
c) Time-apportionment base cost method. This is a method of calculating the value of the asset based on how long you have owned it before and after 1 October 2001.

The calculation is done as follows:
Original cost + [(proceeds – original cost) x Number of years held before 1 October 2001
Number of years held before 1 October 2001 plus
number of years held after 1 October 2001]

Example of time-apportionment
An individual acquired a holiday home for R450 000 four years before the valuation date of 1 October 2001. He had the property for a total period of 7 years before he sold the property for R800 000. He had the property valued at valuation date and the market value of the property at that time was R500 000.

Base cost =
Original cost + [(proceeds – original cost) x Number of years held before 1 October 2001
Number of years held before and after 1 Oct 2001]
= R450 000 + [R800 000 – R450 000) X 4
7]
= R650 000
Proceeds                         R800 000
Less: Base cost (above)    R650 000
Capital gain                     R150 000

Notes:
1. Where no records have been kept and no valuation was obtained on or before 30 September 2004, method a) above must be used.
2. A part of the year is treated as a full year.
3. Where improvements to the asset have been effected after valuation date, the “proceeds” used in the above formula is determined in accordance with a separate formula.

What is annual exclusion?
In respect of each year of assessment the first R10 000 of capital gains is not taxable for CGT purposes. (This is increased to R50 000 when a person dies during the year of assessment.) Likewise, the first R10 000 of capital losses is not taken into account for CGT purposes.

What portion of your capital gain is subject to tax?
A person’s taxable capital gain for the year of assessment is as follows:
(a) In the case of an individual or a special trust, 25% of the net capital gain for the year of assessment.
(b) In the case of a company, close corporation or a trust, 50% of the net capital gain for that year of assessment.

Example of CGT
An individual acquired shares (or participation rights in a collective investment
scheme) for investment purposes six months after the implementation of CGT for
R10 000 and disposed of all these shares two years later for R30 000.

Disposal                                Sale of shares

Exclusion                              Not applicable, shares (or participation rights) disposed of are not                                                                                                                                    `````````````````````````````````````specifically exempt

Gain                           Proceeds                     R30 000
Less: Base cost            R10 000
Capital Gain                R20 000

Annual exclusion: The exclusion of R10 000 is applicable to a natural person.

Capital gain                                       R20 000
Less: Annual exclusion                       R10 000
Net capital gain                                  R10 000
Inclusion rate                                     25% x R10 000 = R2 500
Taxable capital gain                            R2 500

The taxable capital gain of R2 500 must be included in taxable income.

 

PRIMARY RESIDENCE

Will the sale of my primary residence be subject to capital gains tax?

Most primary residences will not be subject to CGT as the first R1 million capital gain or loss on the sale is excluded for CGT purposes. This means that you need to make a capital gain of more than R1 million after 1 October 2001 in order to be subject to CGT.

What is a “primary residence”?
There are two basic requirements which must be met before a home may be considered a primary residence -
• it must be owned by a natural person (not a trust, company or close corporation); and
• the owner or spouse of the owner must ordinarily reside in the home and must use the home for domestic or private residential purposes.

When will the sale of my primary residence be subject to CGT?
You will be taxed on a capital gain if one of the following applies:
• If the capital gain or loss on the sale of the primary residence exceeds R1 million, the portion that exceeds R1 million will be subject to CGT. Similarly, If you had a capital loss in excess of R1 million, only the portion exceeding R1 million will be allowed as a capital loss.
• Where the property is larger than two hectares, the gain on the area that exceeds two hectares will be subject to CGT.
• No exclusion from CGT will be allowed, in respect of a period on or after valuation date (1 October 2001), when the person was not ordinarily resident in the primary residence.
• Any part of the primary residence which is used for the purposes of trade, for example, if you use your study as an office for business purposes, is not covered by the primary residence exclusion.

Example of primary residence

An individual’s primary residence is valued at R1 200 000 on 1 October 2001.
The residence is sold on 1 December 2002 for R1 400 000.

Proceeds                                                        R1 400 000
Valuation date value                                        R1 200 000
Valuation fee                                                  R 5 000
Swimming pool added in November 2001         R 45 000

Proceeds                                                                   R1 400 000
Less: Base Cost -
Valuation date value                 R1 200 000
Valuation fee                           R 5 000
Improvements                         R 45 000             R1 250 000
Capital gain                                                       R 150 000

The gain is less than R1 million and therefore disregarded for CGT purposes. (Should you sell the residence for R2,4 million the gain would be R1,15 million. R150 000 would therefore be subject to CGT.)

Implications if you do not ordinarily reside in your home for one of the following reasons:
• Your old home was in the process of being sold while a new primary residence was acquired or was in the process of being acquired.
• Your home was being built on land acquired for the purpose of being your primary residence.
• The primary residence had been accidentally rendered uninhabitable.
• Upon your death.

If one of the above reasons applies, you will be treated as having been ordinarily resident for a continuous period of up to two years even if you were not living in your home during that two-year period.

What happens if my spouse and I hold our primary residence jointly?
The R1 million primary residence exclusion is divided according to the interest each of you hold in the primary residence. For example, if you and your spouse have an equal interest in your primary residence, you will each qualify for a primary residence exclusion of R500 000.

 

EFFECT OF CGT ON THE CALCULATION OF CERTAIN DEDUCTIONS AND ON THE TAXATION OF CERTAIN AMOUNTS SUBJECT TO A LOWER RATE OF TAX (RATING FORMULA)

The taxable capital gains would affect the calculation of certain deductions and certain amounts subject to the rating formula when calculating taxable income as follows:

• When calculating pension fund contributions in terms of section 11(k) of the Act, the taxable capital gain must be excluded as such gain does not constitute retirement funding income.
• When calculating retirement annuity contributions (RAF), the taxable capital gain must be excluded from the calculation to determine the 15% allowable deduction. The reason for this is that capital gains are part of taxable income and not income as required by section 11(n)(aa)(A) of the Act.
• When calculating the medical expenses deduction in terms of section 18(2) of the Act, the rule that only that portion of medical expenses exceeding 5% of taxable income will be allowed, will also include 5% of the taxable capital gain as it forms part of taxable income.
• When calculating amounts (such as lump sum payments from approved retirement funds), which are subject to tax at a lower rate (“rating formula”) in terms of section 5(10) of the Act, taxable capital gains must be excluded from this calculation.

Example of a taxable capital gain
Salary                                            R 80 000
Bonus                                            R 50 000 (non-pensionable)
Capital gain                                    R100 000
Pension fund contributions              R 7 500
RAF contributions                          R 10 000
Medical claim                                 R 12 000

The first step is to work out the taxable capital gain.

R100 000 less R10 000 annual exclusion = R90 000 x 25% inclusion rate = R22 500 = taxable capital gain

The second step is to work out the taxable income.

Pension fund contributions: R80 000 x 7,5% = R6 000, thus R1 500 is excess (capital gain not taken into account)

RAF contributions: Bonus of R50 000 x 15% = R7 500, thus R2 500 is excess and must be carried forward (capital gain not taken into account).

Medical deduction: R80 000 (salary) plus R50 000 (bonus) less R6 000 (pension) less R7 500 (RAF) = R116 500 plus the taxable capital gain of R22 500 = R139 000 x 5% = R6 950
Thus allowable medical deduction is: R12 000 – R6 950 = R5 050 (taxable capital gain taken into account)

Thus taxable income (excluding taxable capital gain) is R116 500 – R5 050 = R111 450 and according to section 26A the taxable capital gain must be included in taxable income. Thus taxable income including taxable capital gains is R111 450 + R22 500 = R133 950. The normal tax rebates and tax scales will be applicable on the taxable income of R133 950.

Example of an assessed capital loss

Salary                                               R 80 000
Bonus                                               R 50 000 (non-pensionable)
Capital loss from previous year           R150 000
Pension fund contributions                 R 7 500
RAF contributions                             R 10 000
Medical claim                                    R 12 000

Pension fund contributions: R80 000 x 7,5% = R6 000, thus R1 500 is excess (capital loss not taken into account)

RAF contributions: Bonus of R50 000 x 15% = R7 500, thus R2 500 is excess and must be carried forward (capital loss not taken into account)

Medical deduction: R80 000 (salary) plus R50 000 (bonus) less R6 000 (pension) less R7 500 (RAF) = R116 500 x 5% = R5 825.
Thus allowable medical deduction is: R12 000 – R5 825 = R6 175 (capital loss not taken into account)

The taxable income is R116 500 – R6 175 = R110 325. The assessed capital loss will not reduce the taxable income of R110 325 as the loss is ring-fenced and will be carried forward to future years where it can only be set-off against future taxable capital gains.

Please note that the above are just some of the criteria and it is not a comprehensive list.
If more information is required please refer to the sources as indicated www.sars.gov.za.

END OF CGT

Making your investment pay
If you hold your investment property for long enough, hopefully you’ll reach the stage where losses start turning into gains. The rent you’re charging should have risen over time, and you’ll be steadily whittling away at the mortgage.

Once your rental income exceeds your mortgage repayments you’ll no longer be negatively geared, however. And no negative gearing means no tax advantages but that doesn't mean you should rush to sell.

Yes, you'll have to pay more tax because the income you're making is more than your losses but the fact is you’re making money, which is why you invested in the first place.

The temptation may be to take your profits and plough them into another property and that can be a perfectly reasonable strategy but don't lose track of the costs involved in selling. Transfer duties alone are a big disincentive, when re-purchasing.

Selecting a property
Having worked through the financial considerations, and bearing in mind that you’re not actually going to live in the property, you should be able to make a fairly rational decision about where and what to buy.

You’ll want to benefit from as much capital growth as possible, so the first rule is to buy in a growth area.

That might be a suburb located within 5 kilometers of the busy centre, or a suburb with special attractions such as a beach or trendy cafe strip. Proximity to a hot suburb could mean your suburb will be next to rise in value.

It could even be a regional town supporting a booming industry.

Narrow your search down even further by looking at a property’s access to transport, shops and leisure facilities and its appeal to your market whether they’re young professionals or blue-collar workers.

Another decision is what to buy house or unit? old or new? Units usually are a much better proposition for landlords. They’re easier to rent out and easier to maintain: there's no lawn to mow, and when things go wrong in the building the expense is shared with the other owners.

Properties with a view are always more desirable than those without, and tenants like facilities such as balconies, internal laundries, undercover parking and security.

These sorts of facilities may not be available in an older property, which may have to compete with a new apartment building down the road with all the mod-cons.

If the property you’re interested in is already rented, ask about its history of tenancy. Have there been periods when it hasn't been occupied? If so, find out why. You don’t want to inherit those problems.

The bottom line: balance what you can afford to buy with the rent you’ll be able to charge. There’s no point buying a waterfront property if you can’t find tenants happy to pay the sort of rent you’ll need to make the exercise worthwhile.

Buying
Once you’ve found the right property, the actual mechanics of buying it will be the same as if you were buying a home to live in. There are few differences between borrowing for a home and borrowing for an investment property.

Some lenders charge a higher interest rate for investment properties because they say their risk is higher, but shop around and you should be able to get a rate that’s the same as for an owner-occupied property.

Managing your property
It’s possible to manage a rental property yourself, and in so doing save a management fee that’s usually around 5-10 per cent of the rent. But it can be time-consuming and it's hard to remain emotionally detached when you have tenants ringing up complaining about every little thing, or you personally have to deal with damage to your property.
The other option is to use the services of a professional property manager. They’ll have up-to-date information on what’s happening in the market and what tenants are prepared to pay. They’ll have prospective tenants on their books, and experience vetting tenants. Because they manage many properties, they’ll have access to reputable trades people at cheaper service fees.
And their fees are tax deductible.

Insurance
Managing your financial risk as a property investor also involves insuring yourself against a myriad of potential hazards.
It’s up to your tenants to take out home contents insurance to cover their possessions, but you’ll need building insurance.

Renovating
Be prudent about renovations. The colour palette of the kitchen in your investment unit may offend your sensibilities, but it only makes financial sense to replace it if a better kitchen will stop the unit sitting vacant or lift the rent you can charge.
Make a cost-benefit analysis of your renovations. If the kitchen is going to cost R25,000, and you’ll have to borrow the money and pay interest, but it will only add R200 a month to the rent, it’s probably better left alone.
Don't over capitalise by spending too much on design, finishes and fittings.

Non-residential property
Pooling your funds with other investors in vehicles such as property trusts and property syndicates provides exposure to a broader range of property including commercial, industrial and retail as well as residential often with a smaller investment required.

You’ll be spreading your risk rather than being hostage to the ups and downs of the residential property cycle and you’ll still have access to tax advantages such as depreciation but you won’t have to worry about kitchen colours and clumsy tenants.

Property trusts
Property trusts aim to generate rental income from a portfolio of professionally selected properties with good tenants on long leases, along with some capital growth in the value of those properties.

Property trusts can specialise in particular sectors such as retail or industrial property or they can be diversified, investing in various types of property.

They can be listed or unlisted. The advantage of investing in a trust listed on the stock exchange is that you should be able to sell part or a