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It is critical that, before buying an investment property, you do the numbers in order to determine what price you are prepared to pay. If you do them properly, you will realise that finding a good buy is harder than you expected, but that simply forces you to buy with your head and not your heart. Here’s how I did it when I was in the buying mode of my property investment career. You need a modicum of Excel skills because you must build a model into which you can plug the numbers, and see what happens to the monthly…

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If you think that the value of your investment properties is relevant, then your thinking could well be skewed. The only number that really matters is the net rental income that each of the properties produces. And it is the net rental income from which you would calculate the value. Having said that, it is possible that you could sell the property for more than its real worth (based on rental), and that implies that it is a bad investment that should be disposed of, and replaced by one that gives a better return. This typically applies at the top…

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It was once fashionable to hold property in a company, so that when you wanted to sell it, you sold the shares only and the purchaser avoided Transfer Duty, so you got a better price. That led to a structure like this.     This assumes that the properties cost R10m and are worth R40m when you die. The company must have borrowed the R10m to buy the properties, so it is worth the gain in the properties’ value. Despite changes to…

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The property market in South Africa is undergoing zero or near-zero growth, doubtless because it reflects the economy in general, and also because so many income earners are leaving the country because they believe they can do better elsewhere. So, is it a good time to buy? It usually makes no difference whether you buy when the market is low or when it is high. The trick is always to buy below prevailing prices. The first consideration is why are you buying? Somewhere to live. If this is a first time buy, then yes, buy when the market is low.

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I have a client with a property portfolio of just short of R500m. He has been enslaved by his bank and SARS. Here’s how – Government departments only want to rent property from black owned enterprises, so, in the early days, my client was able to buy commercial properties from white owners, negotiate 10 year leases with Government departments and then take those leases to his bank for finance. The bank would then discount the future rental income to present day values and grant a facility for that amount of money. So initially the money received from the bank exceeded…

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I recently had a call about whether student accomodation is a VATable supply. This is an important consideration if you are planning to buy a property for that purpose. I could not answer off the top of my head, so had to do some research and surprise, surprise, there is no simple answer. The South African Institute of Chartered Accountants discuss the matter in some detail, but I have to confess, that after studying the article several times, I still don’t know the answer to the question. In essence, the question is whether the agreement is…

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We have been looking at rentals for penthouses and have found that the returns on high end residential property are terrible. The first thing we noticed was that a penthouse that was for sale for R15m was available, fully furnished, for rent at R55 000 pm. That’s a gross return of only 4.4% before levies etc. It had originally been on the market for R22m! Then there was another one for sale at R12m and available for rental at R45 000 pr month, beautifully furnished. Gross return 4.5%. Now, it is possible that the owners bought at a significantly lower…

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We’ve decided to sell our house and rent an apartment instead. Now why would we do that? Basically, because we wanted to change our lifestyle to one that allows more freedom and less responsibilies. But in the process, (and this only came after we sold) I calculated whether we had made a gain or loss while holding the house. We bought it for R1,8m in 2004 and sold it in 2018 for R2,8m. Profit or loss? At an average of 6% inflation, the value of money halves every 72/6 years (the Rule of 72), that is…

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Once upon a time, you could sell the shares in a company that owned fixed property and only pay Securities Transfer Tax (1/4%). Then in December 2002 it all changed. That was a long time ago, but many people still don’t understand the full implications, so here they are – A Residential Property Company is one in which more than 50% of it’s assets are residential properties. If shares in that company are sold, then the shares are treated as fixed property and the sale attracts Transfer Duty, not on the value of the shares, but on the value of…

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There are several taxes that you need to be familiar with if you invest or trade in fixed property. Income Tax The seller will pay Income Tax on the sale of property which was bought (and perhaps renovated) with the object of selling at a profit. The taxable income will be added on top of any other taxable income earned by the seller before calculating the total tax (at 28% for companies and up to 45% for individuals). Capital Gains Tax (CGT) The seller will pay CGT on the sale of property which was bought (and perhaps renovated) with the…

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I bought a house in Malvern for about R275 000 at the sheriff’s auction in 2010. I paid cash, then raised a bond for R300 000. The property pulled in R14 000 a month so everything was going swimmingly. Then, in 2013 it was hijacked. The highjacker had started running a creche at the house and was making a killing, so when I got an eviction order, he agreed to pay rental. That lasted for a while, then he stopped paying again. Meantime the creche was using an enormous amount of water and he didn’t pay me for the municipal…

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I am an avid reader of Financial Mail, but had to chuckle at their so called Special Report on funding your retirement (March 23 2017 issue). Firstly, it comprised a total of four articles and four large advertisements. Guess who wrote the articles! Then the advice. Below a picture of Richard Carter – “Investors need to make informed choices” Brilliant! Below a picture of Graham Thomas – “Client-centric offerings” Even more brilliant! Below a picture of Karl Liebenberger – “Investors should not consider anything less than an inflationary escalation” Wow! And below a pricture of Natalie Philips – “Packages should…

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I have an attorney friend and client who was about to buy a residential property for rental and quite rightly wanted it to be owned by a company within a trust. The problem was that he didn’t have a trust yet and in those days we didn’t have shelf trusts. He needed to sign the deal straight away and asked my advice. I advised him to sign the deal on behalf of a “company yet to be formed”, then form the trust, then form the company with the trust as the owner. He didn’t take my advice and ended up paying…

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The was a scare recently relating to old Municipal Accounts and their attaching to the new owner of a property that has changed hands. Some Municipalities claimed that the new owner was liable for the old debts and threatened to cut off electricity and water supplies if those old debts remained unpaid. This can no longer be the case. A recent Pretoria High Court judgement has cleared the air. Only if the property was bought on sherrif’s auction does the new owner become liable for old Municipal debts attaching to the property. The case is currently on appeal to the…

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You get the cheapest properties at Sheriff’s auctions and they can earn fantastic returns, but there are significant risks. Firstly, the sheriff does not give you vacant occupation. This means that there is usually someone using the premises and you either have to negotiate a deal with them or get an eviction order and then have the sheriff evict them. The eviction is easy and only costs about R10 000. The problem is that once you’ve got them out, you’ve got to keep them out. The chances are they’ll simply break in the next day and you cannot ask the…

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If you are planning to buy commercial property, take care and you will pay no transfer duty and no VAT. Firstly, both the buyer and the seller must be VAT registered. This often means that clients are willing to pay our fee (currently R25 000) for a VAT registered shelf company. Your company buys, not the building, but the business of building rental including all of the assets necessary for the business to continue as an income earning going concern (including, of course, the building). The building must be income earning at the time of the purchase (i.e. not be…

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So, you’re investing in property in order to sell it at a profit or to earn rental income. Either way this is trade and if the trust owns the property the tax is 45%. How do you avoid this heavy tax? But firstly, why hold the property in a trust in the first place? The reason is that you want to grow your wealth and you do not want too much wealth when you die as it is subject (after allowances) to 20% Estate Duty and up to 18% CGT, a total 38% of your investment wealth (ignoring the allowances)…

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If you’ve read my blogs on Investing in Property and on Trusts, or if you’ve been to see me for a no charge chat, you’ll know the right structure for your investments. But how do you fix it if you got it wrong in the first place? I call this unscrambling eggs! If you own investment property in your own name and want to sell it to your trust you’re in for two taxes – Transfer Duty at up to 13% and CGT at up to 18%. You’ll…

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Property is, in my view, a great investment but you gotta get it right! Here’s a trap that you hadn’t thought of – Let’s say your company buys a property using a 10 year bond on which the repayments will be R10 000 per month and the rental income is R10 000. Ignoring everything else, the cash flow is zero right? Wrong! Of that R10 000 bond repayment about R9 000 is deductible interest and R1 000 is capital repayment which is not deductible, so the company will be in for tax on R12 000 in the first year, which…

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I’m often asked how to go about buying investment property. How and where do you look for the bargains? I think it’s important to understand first off that the bargains are the result of distressed sellers (that is, owners who for one reason or another have to sell). A distressed seller can arise from – a death where the executor of the estate needs to liquidate the assets in order to distribute them equitably, – a divorce where the asset has to be split between two parties – a re-location where the owner(s) are moving to another town/country – a…

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