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db88
Contributor
Consider the following sceranrio: You are young with a stable income. You have a dream of becoming a property mogul by accumalating a number of properties over your working life... You are about to purchase your first property. What are the advantages and disadvantages for you to set up a private company and purchase the property (and hopefully many others!) through the newly established company?
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55 REPLIES 55
Super Contributor
only advise I'll give is - are you sure you want to be a property mogul?
have you done the calcs to see what returns you'll be getting annually, (hint: there are at least 6 costs you need to deduct from rent before you get a penny).

If youre still set on going that route, do a bit of research between commercial and residential property as well, it will help you determine a structure.

Good luck.
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Super Contributor
You need to chat to a financial planner about setting up a trust or two. Getting the structures right to start off with is crucial. It will be money well spent and protect you (and your eventual family) when you need it most. It's also tax beneficial over the longer period.
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Not applicable
biggest problem you will have is finance. As a company, the banks won't recognize your private income - unless you bill it through your company as well. So you will struggle to get a bond. Second problem is more related to disposal afterward and the CGT impact. Third problem is that I am not so convinced you have a tax benefit. Biggest advantage is that as soon as one is paid off, you can borrow from it to buy the second, and offset the rent from the second against the interest paid on the 1st. You can no longer do this in your private capacity.
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el_nino
Contributor
Rather buy NEPI or Coronation Property...
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Som2
Contributor
So in your opinion a trust is better than a company? If so, is it also better than buying in personal capacity? What are the typical costs of setting up the trust and annual administration cost?
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Super Contributor
Agree...Do not forget costs when selling a property....Sold two recently...CGT, agents commission, electrical certificate, entomologist certificate, timing costs waiting for buyer with bucks, maintenance ete etc etc. Rather go the property share route where you can buy and sell on a click on the mouse.
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Frequent Contributor
Safe as houses is what springs to mind for me.. I have bought some property in my private capacity. Yes there are losses incurred. But there is also much to gain provided you buy the right property in the right location. A great route to go at the moment is purchasing property at auctions. There is no failsafe route in life, thus the reason for diversification. For me, well renting out a property where I manage to get someone to cover the bond through rental (possible at the moment with low interest rates and also if you buy below market value on auction) plus getting the growth on the property over time is a "like" in my book. Each to their own here I guess... I would buy in my private capacity as you will pay less tax and less chance paying speculators tax if you hold onto the property for a while. Do yourself a favour and but the book, "How to make money out of property in South Africa - By Jason Lee". You can purchase it at C&A and it will give you some good insight. Hope this helps.
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db88
Contributor
Thanks for the replies. Skaaptjop, I really appreciate your response. I never even considered the fact that it would be hard to get a loan. I do however think there are some tax advantages over the long run. As to the replies regarding investing in property shares, I must say that I do not agree. Investing directly in property definitely has its advantages, the main one being that you can use somebody elses money for what I consider to be a relatively low risk investmet. Sure there are lots of expenses, but the rental income and capital gains should compensate over the long-run (especially if you buy the right property).
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db88
Contributor
Thanks Funnymoney. I agree 100%! I have been looking for that book at some of my local book stores. So far I have been unsuccesful. I'll have to look online.
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Frequent Contributor
No problem db88.. Remember discussing this topic on a forum will give you opinions to last a lifetime. Some like shares, some like property.. I have shares, but far prefer property. But that is just me. I agree with what you have said regarding someone else essentially paying off your property. You won't get away with maintenance and general issues. Word of advice, buy in the right location and manage your own property. Remember it is your assest and an agent has zero strings attached. Try through the banks to see what you can qualify for and good luck. But i definitely recommend you purchase that book. I only bought it once I was already in the property game and it certainly opens your eyes to a few things which one would've learnt over time.
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Super Contributor
that book will be your funeral, from what I read his advice was simply leverage yourself 110% because property prices never go down. Its like saying go all in on Mr Price because its been the best share for 3 years, today you would've had to sell your shirt.

I say again if you feel comfortable with property go with property, just do it carefully in the same way you would trade shares. Property as an investment vehicle is no different from Equities or CFD's they each just have their own set of risks and rewards.
That book by Jason makes as if property is no risk no brainer investment - its not Property CAN lead to losses. Over-leveraging yourself can lead to bankruptcy.
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Super Contributor
And regarding the your comment on property capital gains returns, compare GRT and RES (>25% CAGR) Capital gains over 10years, I have yet to see a residential property do better than 15% CAGR over 10 years. Commercial property Ive seen it and short spurts in holiday areas (but these can sometimes be riskier than penny shares).

Re: the tax deduction on rental income does nobody realize that they are paying R 100 to get R 40 back?
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db88
Contributor
Please explain your rental deduction comment?
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Super Contributor
your taking out a loan of say R 100, with 10% interest so R 10 interest and SARS allows the deduction (of say top tax bracket of 40%). Effectively you'll get to deduct about R 3 against the 10 but lets say max R 4 (R 10*40%). ...So your paying R 10 to get R 4 back, in my books that means thats an extra cost of R 6, everybody else sees this as yippee Im saving R 4.

All these extra costs of interests, repairs, income tax, property tax, ....they all eat away at your returns. when determining whether something is a good investment whether a share or a property you need to calculate: Possible Capital Growth + (Income - Expenses).

This is effectively a DCF valuation, normally done on shares applied to property .

What you cant account for is how many dodgy developers do you get? How many times are you going to fix that stupid geyser, what if your tenants dont pay (GRT hasnt missed a payment yet)

Ive said it in the past, property will make you profit, the question is how much profit as opposed to an easier investment like property shares? Are you really sure youve done all the homework in comparing CAGR between commercial property and residential property?
Are you also sure your residential property is more popular than the V&A Waterfront?

Some properties are very good investments, just make sure youve done the homework and you know the risks.
I say these things because I also once thought I was going to be a property mogul, luckily bad experiences at the start made me realize its not as easy as it looks (safe as houses is a rubbish axiom).
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Highlighted
Frequent Contributor
Stay away I have been a landlord for 14-years. Just replaced new geyser and installed two-cable DSTV and new box required for geyser. Paid cash for the apartment in Bantry Bay. If I had a bond I would have been screwed long time ago.
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Not applicable
I don't know if i'm just to stupid to get it, but this question has been bugging me for years. I haven't yet crunched the numbers, because i'm sure I'm not aware of all the costs. I know it is expensive to buy physical property with all the costs involved, but surely if you find a property with a positive cash flow after cost or break even it must be better than listed property. Sure its more risky, but is this not worth it if you follow the route of periodically refinancing and acquiring additional properties and therefore never really generating any profits until you decide to stop and live off the rental income. Can the smarter guys on the forum explain with some practical examples why they argue that listed property is better than physical property apart from the fact that its a lot less risky.
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Super Contributor
One good reason to go for listed property is that u get an income stream in interest,right away i.e. every three momths or every six months....The interest stream is none too shabby.If u select your loan stock or property unit trust,u can receive anything between six and eleven percent now and it will grow in time....your capital will also grow in value.
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Super Contributor
Oh and the powers that be,from government to muncipalities are looking at all kinds of sly ways to tax a multilpe property owners these days.Also the sky high cost of owning a house is now really getting beyond what an owner must then ask his lessee.
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Not applicable
listed property is not less risky - it is just a different kind of risk. You get a better yield than you would on buy-to-let, and you have much better diversification. Also, some of those shrewd buggers have the ability to take a cut in the topline of their tennants revenues - if that aint good business, I don't know what is. Most important though - listed property have the ability to raise capital in ways that you in your private capacity can only dream of - so they go for the top quality stuff. And you can leverage in your personal capacity - there are companies out there that offer leverage on your listed property portfolio. My strategy has been to max out on my bond and buy listed property stocks. I have been doing this for a while now - and I am paying prime minus 2 on a loan I took out in 2010 to buy Redefine and Growthpoint. I am earning a 6% yield now - but that is effectively around 11% thanks to a 40% capital appreciation. I am now looking at remorgaging again to buy more - only this time I am more interested in the higher yield ones - that seem to be growing faster - such as Syngergy
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