Buy To Let .co.za

There are many different ways to invest your money, each with its own particular advantages and disadvantages. Against the backdrop of volatile global stock markets a residential property investment could continue to be a safe and profitable investment.

There are also a number of social and demographic factors that further support investment in the residential property rental market:

People are getting married later in life, and therefore often find themselves renting a home first.
The increase in house prices is raising the barrier to entry to the property market for first-time buyers, who then need to rent initially.

There are more single households as a result of the growing divorce rate, increasing the demand for rentals.

People tend not to stay in the same job for long and want more freedom of movement. Renting instead of buying makes this possible.

Astute investors are realising the investment potential of residential property and are including this in their investment portfolio.

An obvious intention of investing in residential property is to make a return on your investment. In general terms your return is obtained from the excess of rental income over expenses and the capital profit when the property is sold.

In most circumstances any alternative to an investment in residential property requires the investor to contribute a substantial amount of cash at the commencement of the transaction. One of the advantages of residential property investment is that, in addition to a deposit, the investor is also able continually to invest in the same property every month. This is often a requirement as the rental income earned will be less than the loan repayment and other costs at the initial stages. In order not to contribute, or contribute a lesser amount every month, the investor will need to pay a higher deposit. Therefore, as with other investment classes, investors in residential property may be required to make either an initial lump-sum deposit or may have to Invest an amount on a monthly basis, or a combination of both.

Residential property is a fairly distinct type of investment in that loan funds are readily available to residential property investors, compared with investors in other asset classes.The extent to which a person borrows money to invest in an income-producing asset, is known as gearing. Gearing is generally expressed as a ratio. For example, 100% gearing means you have borrowed the full amount of the investment, while gearing of 50% means that you have borrowed only half the investment amount.

There is a cost, in the form of interest and the repayments on the loan amount, associated with borrowing money. However, from a return perspective you will benefit from the capital growth on the full investment amount and not just on the amount that you invested. In the case of a residential property investment this means your return is based on the total property value, not just the deposit Gearing magnifies your return, but it magnifies your loss as well. Always consider that there may not always be capital growth. Therefore, the more you borrow, the greater your potential gain or loss!

Types of property to invest in

There are basically three options from which to choose, namely a freehold dwelling, sectional-title unit or a cluster home. Although all types of property may be rented, flats and townhouses, which are typically sectional-title units, tend to be popular with the residential investor because there is a larger target market, and they tend to be easier to manage than clusters and freehold dwellings. Your own particular investment preference will, however, determine the final choice.

A freehold property is normally registered in your own name and you are free to manage your property independently within the bylaws and legislation. You are also responsible for the maintenance and improvements. A cluster home and vacant land are also classified as freehold properties. If you opt for sectional-title ownership, you buy more than _lust the unit. You share common property such as gardens, swimming pools and security. For this you'll pay a monthly levy to meet running costs. Administration and maintenance of the complex and common property are the responsibility of the body corporate. Trustees, who are elected by unit owners, represent the body corporate. You are responsible for the upkeep of your own unit.

Ownership options

Registering a property in your name or jointly with another person is the easiest and most common way of owning property. Other alternatives include purchasing a property in a company. close corporation or trust. Lip to 12 December 2002 the sale of:

•           a member's interest in a dose corporation;

•           a beneficial interest in a trust; or

•           shares in a company,

attracted no payment of transfer duty on the transfer of the property and only 1% on the transfer of the shares. This position has changed and transfer duty on the sale of the interest is now payable at a raw of 10%, which has to be paid within six months of the date of conclusion of the offer to purchase.

In the past, although the initial transfer duty was (and still is) 10%, subsequent transfers would be at 1%. Therefore acquiring a property-owning legal entity instead of the property itself enabled buyers to escape the transfer duty net. Purchasing a residential property through a legal entity is now financially unattractive.

Buying a property in a close corporation, company or trust also brings about the danger of buying a tainted company, that is an entity with undisclosed liabilities, debts not yet at judgment stage or sureties for which the entity is still liable. Legal entities do have the advantage of having their own separate legal personalities. In practice, however, lenders or creditors generally require some form of personal surety from the directors, shareholders or members, which negates any advantage. Close corporations, companies and trusts may offer estate planning advantages, but as the Financial, estate planning and taxation requirements of each investor differ, professional advice in this regard is recommended.

Taxation

Capital gains tax was introduced in South Africa on 1 October 2001. This is a tax paid on the profits made on the sale of any asset, including residential property. If you purchase a property for your own personal occupation as your primary residence, you are exempt from capital gains tax unless you make a gain or loss in excess of 111 million when you sell the property. Each year individuals are entitled to make a gain of up to R10 000 tax-free. if you make a gain of greater than R10 000 and you are an individual, you have to include 25% of the net gain when calculating the tax payable. For companies, close corporations and trusts 50% of the net gain is included when calculating the tax payable. Remember, you will only pay tax on the profit you make, not the total proceeds from the sale. This means you can deduct the cost of buying and maintaining the property from the amount you realise at the sale. It is therefore essential that you keep all important documentation and receipts of expenses relating to the purchase and improvements

Residential rentals are exempt from VAT, regardless of whether or not the landlord is a VAT vendor. The rental income will be liable for Income tax, but any loan interest may be set off against rental income for tax purposes. The interest portion of your loan will be disclosed in your Nedbank Buy To Let loan statement. Expenses related to the property may also be tax-deductible. Once again the financial, estate planning and taxation requirements of each investor differ and professional advice In this regard is recommended.