Money or the house?

There's a great competition that's just been run by a casino and radio station where the winner gets a multimillion rand house as first prize. The house is also furnished (or a budget is allocated to furnish the house) as well as a very nice car is thrown into the overall winner's prize. That value of the prize is easily calculated as around R2.5 million rand but the sponsors have gone to great lengths to point out how much more the prize is actually worth.

Using a financial expert who presented different scenarios, they were at pains to point out that the value of the prize is much more than the initial R2.5 spent on the prize. This is due to three main factors:

  • The money it can save you - you could sell your own house (and car) and move bond-free into this dream house. Your living costs could drop to virtually zero.
  • The money it can generate for you - you could opt to rent it out and pocket the rental money. Although you would have to pay tax on this rental it is still substantial and will increase in time. You could also move in and rent your own house out.
  • Capital growth - the most compelling argument put forward by the financial advisor was the capital growth inherent in property and even using conservative figures of 10% escalation the value of the property would double every 7.2 years.

This capital growth is yours whether you rent the house out or live in it. Living in it would save bond or rent costs while renting it out would generate further income.

The point here is that that value of the prize was easily projected to be worth up to R10 million in a few years. They also used scenarios of selling the house and putting the money into other financial investments in order to be able to fund some of the lavish lifestyles that they were promoting.

What would you opt to do if you had this choice? Would you sell off the house to fund that extended cruise or skiing trip? Or would you use it to generate income for your children's education and your retirement? Would you move into the house and sell your own? Or keep both houses and rent either out?

The answer to this question is that your choices are up to you. The maximum benefit is probably reached by selling neither of your properties and looking to maximize your return on this windfall by making use of all three of the value-adding methods listed above, viz. income generation, cost reduction and maximum capital growth. Use any rental income to further reduce your own bond quicker and thereby still further adding to the accumulating cost reduction effect.

The final point is that the value of the property (and the prize) lies in its income generation potential as well as its capital growth potential. Someone is a seriously richer person this morning! Much richer than just R2.5 million!

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