Buy To Let Comprehensively Explained
Taxation of Property
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.
How much can you afford to borrow?
Monday, 24 November 2008 16:38 | Written by Louwrens Koen |
The amount you will be able to borrow is based on your individual creditworthiness, ability and willingness to repay the loan and on your personal circumstances. Generally, your existing loan repayments and the repayments on the new Buy To Let property should not exceed 30% of your joint gross monthly income. This means that the income of your spouse or partner, who must be party to the transaction, will also be taken into account. As a guideline, if you put down a deposit of at least 10% of the property value, up to 40% of the potential rental income from the Buy To Let property will also be included when determining the amount of your maximum monthly repayments. To qualify for a Nedbank Buy To Let loan your minimum joint gross monthly income must be at least R30 000 per month. The above guidelines are flexible and any well-motivated application will be considered. The following graphs will enable you to easily work out an approximation of: • your maximum loan amount based on your income and rental income; and • your monthly repayment. Figure 2 illustrates the maximum income available for loan repaymens and is calculated as 30% of your joint gross monthly income. For instance, assuming a loan term of 20 years and an interest rate of 16%, if you earn R40 000 per month, your maximum loan amount would be R860 000. Your loan payments would be R12 000, In the case of a deposit of at least 10%, figure 3 illustrates the deemed additional rental income amount that is taken into consideration when determining your maximum Nedbank Buy To Let loan amount As a guideline, the deemed monthly rental income is assumed to be 1% of the property market value. Forty per cent of the deemed rental income is then added to your monthly income to determine your Nedbank Buy To Let loan amount For example, if you were to purchase an investment property of R500 000, the deemed potential rental income would be R5 000 per month.Last Updated (Monday, 24 November 2008 16:39) Aquisition and running costs of property
Monday, 24 November 2008 16:40 | Written by Louwrens Koen |
The cost of a Buy To Let investment is far more than just your monthly loan repayment. When doing your budget, you should include all your monthly costs, which you will have to meet on top of your monthly loan repayments. These costs might include: • Life Insurance premiums • Insurance premiums for buildings and household contents • Rates, taxes, water and electricity • Maintenance costs • Refurbishment costs • Advertising costs for tenants • Letting agent costs |
Offer to purchase
Monday, 24 November 2008 16:43 | Written by Louwrens Koen |
When you make an offer on a property, you are required to sign an offer to purchase. It is the seller's prerogative to either accept or reject the offer within the specified time period. On acceptance, your offer to purchase becomes a legally binding contract. So, before signing, read through it carefully. Check in particular for the following:
On signing an offer to purchase, you may be asked to pay a deposit.This is generally payable to the estate agency or the attorney appointed to handle the transfer of the property. Both these parties have trust accounts where your money is protected. If you pay a deposit, ensure that you receive the appropriate receipts and confirmation that the funds have been placed in a trust account. Remember to specify that interest is for the benefit of the buyer.
Applying for finance The first and most important stage in applying for finance is to ensure that you obtain the best advice and Buy To Let loan option that suits you. Insurance and assurance
Monday, 24 November 2008 16:49 | Written by Louwrens Koen |
Houseowner's insurance is a condition of most horneloans, which insurance covers the property, including the outbuildings, eg garage, swimming-pool, walls, driveway, etc, and improvements for the full replacement value.
Life cover is also sometimes required. Either a new policy may be taken out or an existing policy may be ceded. This is to protect you and your family and ensure that your loan is settled in the event of your death. Even if life cover is not a condition of the Buy To Let loan, we strongly recommend that sufficient life cover is in place. |