Property ownership and property investing.

Most middle and upper class South Africans own their own property but this doesn't make them investors. There are fundamental differences between ownership and investing that make investing to ownership as different as music is to martial music.

Ownership can be used as a vehicle for this type of investing but merely being an owner doesn't make you a property investor. People delude themselves into thinking that as long as they own property and are paying their monthly installments on time they are on the road to property riches.

Owners buy where they want to live often without regard to the investment potential and on average change homes every 5-7 years. Even if their property has doubled in value in this period, a substantial chunk of that 'profit' is lost in the financial friction that is so inherent in property transactions in this country as well as all the ancillary costs that often accompany moving to a new house (curtains, furniture, re-modeling).

The net effect is that the average Joe Soap (after his much deserved new car) has just swapped his slightly cheaper home for a more expensive one that leaves him in the same debt trap that he was in 5 years ago.

Ownership does, however, have beneficial spin-offs. Most notable is the inflation hedge value of property. Once you've purchased a home, you've put a peg in the property value market and as property values go up your property should keep pace not making you money but rather keeping you in the game.

Here's a scenario where you could use property ownership as a vehicle for property investment: You probably bought your first home before you turned 30. Imagine if you steadily ploughed a 10% increase in your repayments back into your bond. You also don't fall into the ATM-in-the-kitchen syndrome and use your increasing positive equity to fund your lifestyle. Within 10 years you would be living bond free.

Now instead of selling and moving, imagine just moving. If you bought correctly in the right neighbourhood you should be able to rent out your original home and put all that extra income (after making provision for tax, of course) into your new home and bond, also applying the 10% escalation rule to these repayments. This time, however, you've also got the help of the second property's increasing rental to contribute. Within 5-7 years you should again be bond free.

Given our timeline you should be in your mid-forties with a lucrative income from a second property and a bond free property as your home. You're in a position to buy that holiday home on the coast now and rent it out. By the time you're 55 you'll have 3 paid off properties and a holiday home that would be a wonderful retirement home. Debt free of course.

The reason this scenario works is that you're not losing out to tax (CGT or transfer costs) as well as other transactional costs while using the increasing income or disposable income to effectively reduce any debt and leveraging the inherent inflation or growth in property value to your benefit.

That's property investing through property ownership.

Article by: Dave Welmans -