Property vs property ETFs/REITs
In part three of my partial and critique of asset vehicles, I will prove that you should give me all your life savings as a donation to so that I can grow my property empire.
I will explore rental properties and ETFs/REITS as possible investment vehicles and compare their returns over 20 years.
If you want a quick answer, here goes:
- Rental property profit (after tax): R 1 085 322,29
- REITs profit (after tax): R 205 736
We need to compare apples and pears
If you’re looking for a full explanation on how I calculated the rental property investment, feel free to check out the article here.
It boils down to the following:
- A once-off lump sum of R 50 000
- A monthly fee of R 1 000
- I assume the person is in the 36 % tax bracket
Let’s get into this
The current details are:
I am going to calculate the rental property’s annualised returns via this nifty tool:
- Annualised rent escalation is 4.67 %
- Annualised property value escalation is 7.18 %
- Deductible costs escalation has been 8.12 %
- Today, the bond and transfer costs will be R 14 394 on a R 100 000 property. I will buy three because I am maxing out the R 50 000, and the monthly shortfall.
- As we are working historically, for the last 20 years, I will thus triple the amount to get the total initial investment at R 43 182 – just because I can be biased.
- I have lowered the real value here to R 400 000 per property from the original article’s claim of R 420 000 because I would want to sell them off quickly for this example.
Let the property calculations begin!
- Investment: You will have invested R 20 027.45 x 3 = R 60 082.35
- Taxes: You will have paid R 34 385 in tax x 3 = R 114 677.71 (after the R 40k CGT break)
- Gross: You will have R 4 00 000 today x 3 = R 1 200 000
- Profit: Your profit would be R 345 587.55 x 3 = R 1 085 322,29
If you would like to know more about what an ETF is, you can check out my article here.
REITs – real estate investment trusts are trusts that use peoples’ money to buy property. They share the profits with all the people that invested in the trust.
iShares Global REIT ETF
It seems like cash cow REIT ETFs are hard to find. This might be due to the general feeling (that I have) that property companies have not been doing great over the past few years – some may in fact describe performance as terrible.
I have decided to use the iShares Global REIT ETF as my benchmark, as this seems to be what someone on Twitter believes is the right choice.
If you’re looking for the fact sheet, please check the link here.
I will be using their market price performance indicator, because it’s the best one they have – which is 6.84 % annualised.
As I am biased, I will add a second magical investment that returns of 10 % for comparison.
Note that I am not including the following, as these might differ from person to person:
- Initial investment fees
- Advisor fees
With REITs, all interest/money earned is taxable as income. It is not seen as dividends, meaning that you will need to pay your standard PAYE tax rate on your investment. Depending on your tax bracket, this could set you 45 % back!
Your investment platform will give you a It3b. The REIT will be reflected on this. SARS will then calculate what you owe them.
As your tax will not be deducted by the investment platform, it makes it challenging to see what the impact of fees will be. I have thus opted for making the following calculation for simplicity:
36 % of 6.84 % = 2.4624
This means you would effectively be only getting 4.36 % return on your investment.
- Investment: You will have invested R 290 000
- Gross: You will have R 495 736 today
- Profit: Your profit would be R 205 736 (tax and initial investment deducted)
There are vehicles such as a TFSA wrapper to make REITs more profitable – do your own research.
Make sure you understand the impact of your choices.
Leveraging property can be profitable, but there is a level of knowledge required. If you do this recklessly, you will die a slow and painful death.
Read my other posts on property and emergency funds – have all of these in place in case something terrible happens!
Invest wisely and happy investing.
Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things – such as the article you’re reading!