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