would have paid towards a bond . So , if you are renting a one-bedroom apartment in Cape Town for R9000 and could be paying off a bond of R1.6 million at R16 000 a month , are you actively saving and investing the current difference of R7000 ? For most people , due to a lack of financial discipline , the answer is generally ‘ no ’. Buying a property , however , forces you to save . How so ? Firstly , and quite simply , your bond is a form of savings : the more you put into your bond , the more equity you have in your home , which you can access for a rainy day . Secondly , few tenants really have the financial discipline to invest the full savings made while renting and not buying ; many just upscale and rent a more expensive property instead . But if you choose to rent out your property instead of live in it , you can get to a point where it is paying for itself and earning you a profit .
Finance expert Jayson Coomer maintains that if you do buy it should be because you are going to come out better than if you rented . To know if this is going to be the case , you need to do the math . We will touch on more of the financial preparation side of your home ownership journey in the second instalment of this series . Here you will be will be introduced to My BondFitness ’ innovative tools and calculators , which you can use to assess your financial readiness .
2If I do buy , should I buy to live or buy to let ?
Most first-time buyers want to break into the property market for one of two reasons : they either want to buy a home to live in or they want to buy to rent it out .
In the first scenario , the property forms part of their lifestyle . They are looking for a place to live in , put their personal mark on and call their own . In the second scenario , they want to buy as a pure investment . Here buyers can buy and then rent the property to help pay off their bond and build positive cash flow and over time create equity in their property portfolio , or they can buy a property to flip it ‒ i . e . buy with the intention of reselling it for a profit .
Buy to Live : The Pros
• Builds equity .
• Provides you with rent – free accommodation and avoids associated annual rental escalations
• Yours to renovate and improve
• Greater privacy
• Predictable costs based on a fixed-rate mortgage
• Tax deductions on interest and property tax portion of your mortgage payments if renting out
• Access to Government subsidies for first time home buyers
Buy to Live : The Cons
• Long-term commitment
• Higher mortgage payments than rent payments
• Property value may not increase
• Large upfront costs , including initial deposit , transfer and bond fees
Buy to Let : The Pros
• Cash flow earning potential from tenants
• Earning potential from property in capital value growth
• Provides time to save for your own dream home
• Equity in property can be used to gear further property acquisitions
Buy to Let : The Cons
• Mid to long term commitment and investment ( 5 – 10 years )
• Income taxes and property taxes
• Capital gains tax
• Running costs and insurance costs
• May need to subsidize rental vs bond repayment shortfall for a period of time
• Potential void periods ( i . e . no tenants and no income )
• Delinquent tenants
• Administrative and management responsibilities
Real estate builds wealth The biggest benefit of investing in real estate is that it generates wealth . According to Kim Kiyosaki , in his workbook , Rich Dad ’ s Road to Riches , wealth can be defined as the amount of money you have to live on without physically having to work , which enables you to maintain the standard of living you want . For some people , that just means the savings in their bank account – if they have any . Buying-to-let is one way to generate a passive income that can increase your wealth . This does not happen overnight .
Buying a property , either to live in , or to rent out , is an expensive and long term project . Make sure that you are well equipped , educated and informed before you go to sign on the dotted line .
Do follow the 8-step education guide over the next few months , but if you cannot wait and ‘ must ’ buy a property as soon as possible , get in touch with us for the comprehensive A- Z Guide – How to get yourself ready to buy your own property . You can drop us an email at info @ reimag . co . za and we will forward that onto you .
RESOURCES
Money Crashers , Forbes . com , BusinessTech , Finder . com , InCharge
12 FEBRUARY 2017 SA Real Estate Investor www . reimag . co . za