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The Property Game - Property ownership

Supplied by Dave Welmans www.thepropertygame.co.za

Over time, the ownership of property has been proven to be a significant force in building personal wealth. Aside from the numerous financial benefits of owning your own home, you can’t discount the warm fuzzy feeling you get when you know that you own the house that you live in.

The Upsides Of Property Investment

Leverage

The ability to finance property is the key element needed to play the property game. Property is about the only thing for which banks will be falling over themselves to lend you money. Why? Because they know that lending money on a property is probably ‘as safe as houses’ for them. You never find banks and other financing institutions advertising loans for tech stocks, or investments in pyramid schemes. The underlying rationale is that they’ve invested in an appreciating asset and if you don’t pay the bond they have an asset that they can repossess and resell. Not many people have the sort of money needed to buy a house lying around without a bond or mortgage. Banks are keen to finance property, since it’s one of the few low risk assets that are almost guaranteed to appreciate. Leverage or gearing means borrowing money from a bank to finance the purchase of a property. In other words, you’re using other people’s money to finance a purchase. If and when the property’s value increases, the investor gets the benefit of the appreciation in the total price of the property and not just his initial deposit or payments, while still retaining his ownership of that property. This is the beauty of leverage.

Inflation

Inflation is often seen as a baddy in the investor’s world and investors will look for inflation-hedged investments. If an investment is inflation-hedged it means that its value doesn’t depreciate over time, but either keeps up with inflation or exceeds it in terms of growth. Property is one such asset.

Management

Property seldom requires daily attention. If responsible, preventative maintenance is carried out, a house will require minimal attention. The only other form of management required is the management of tenants if the property is rented out.

Stability

Property values don’t have to be watched on an hourly basis like shares in the stock market. Nor do they jump up and down daily like the equity market and it’s unheard of that the value of a property plummets 20% in a day, which is something that can happen with shares.

Tax shelter

In South Africa, property investing does attract tax depending on the method of investment. You might be liable for Capital Gains Tax (CGT) as well as income tax based on income generated from property. Even so, the rate of taxation is lower in the case of CGT and is deferred until such time as you realize your profit. You can claim tax deductions on the maintenance and upkeep as well as the interest portion of the bond, if it’s a rental property.

The Downsides Of Property Investment

Not very liquid

Property can be termed illiquid, because of the time it takes to market and sell, as well as the length of time it takes to transfer that property at the Deeds Office before realising your money. Unlike other investments that may be converted into cash within a very short period of time, property takes much longer.

Real value

It’s difficult to establish the exact value of a property at any given time. Agents and evaluators can only give you an approximation of the value. What determines the real value is how much a willing buyer is prepared to pay for that property at that specific time. You might think it’s worth a fortune, but whether anybody is willing to part with a small fortune to acquire it will only be seen when you try to sell the property. The sale value is not quite that value to you as the owner, because there are a number of costs, mostly commissions and taxes, to be taken into account before you can put the change in your pocket.

Cash flow

Property ownership can often be a draining exercise on your financial resources. If you’re renting a property out, the rental market is not always in sync with the value of the property, not to mention the ongoing costs of maintenance, as well as those times when a rental property might not generate income at all while you search for a suitable tenant.

Management

Management of a property, especially a rental property, can sometimes present huge demands on one’s time and require an inordinate amount of management if saddled with difficult tenants or ongoing maintenance problems.

Interest rate risk

A further downside of property ownership in South Africa is the risk of escalating interest rates and the effect that this will have on your monthly bond repayments. South Africa’s interest rates have been yo-yoing for as long as we care to remember. Interest rates have fluctuated between 11% and 24% over the past decade. This is a huge risk to property investors who are highly geared or have to deal with an increase in bond repayments without the commensurate increase in income.

Portability

Finally, property is not very portable. In fact, it’s immoveable. Unlike gold coins or gemstones, property is by its very nature anchored to the earth. Although it’s possible for the property to be sold to a person living anywhere in the world, it’s unlikely that a buyer for a piece of property in Juskeirivier will be sold to someone from Outer Mongolia.

Conclusion

Taking into account the pros and cons of property ownership, it’s clear that in order to build your long-term wealth, this vital investment cannot be overlooked. The biggest challenge facing South Africans who don’t yet have a foothold in the property market is the task of gaining access to this market.

Article by: Dave Welmans - www.thepropertygame.co.za