// LOCALMONEY

Tag: Property

  • How to buy property on auction in South Africa

    How to buy property on auction in South Africa

    Auctions and bidding

    Buying a property at auctions in South Africa can be disastrous if you don’t know what you’re doing. You can also buy an absolute bargain.  

    When going to an auction, you need to know what you’re doing. You need to know your limits, what you’re buying and how the process works. Having all the detail upfront – paired with your knowledge and research, you can make a pretty penny!

    I know of someone who picked up a property with no reserve for an amazing R 5 000! This is possible! 

    In this article, I will explain what an auction is, break down the different types and top tips when attending auctions. 

    Why are you buying property at auction?

    Many people believe that they will get a bargain at an auction. 

    This is not necessarily the case.   

    When buying property at auctions, you need to give attention to all the normal investment considerations such as location, price, area and block/complex. you also need to think about your strategy: are you buying to sell, buy to let, fix and flip or something more sinister like Airbnb? 

    Once you’ve calculated the cost to make the property worth your while, you’re ready to hit the auction floor. 

    How do auctions work?

    The concept of an auction is simple: The auctioneer (who handles bidding) starts with a price. The interested parties bid against each other until no one is willing to pay the bidding price anymore. The person who has the final bid ‘wins’ the auction.

    In some cases, there will be a party chasing up the price (such as the bank).

    A reserve is a minimum amount that would be accepted as a minimum. 

    On a more technical level, you would need to ‘register’ to become a bidder. Many of these will require you to pay a fee to show that you’re serious. You should receive a bidders card in the process with a sales catalogue. The sales catalogue will include details such as the conditions of sale and copies of the title deed, site plans, zoning certificates, lease agreements and rental schedules.  

    If you have the winning bid, you will be required to pay a deposit, normally 10% of the deal.

    You need to go through with the deal. If you do not, you will lose your initial deposit or/and other fees you have paid. 

    Different types of auctions

    An auction is not an auction is not an auction. Let’s look at the different types of auctions. 

    Voluntary auctions

    In some cases, the homeowner can make a lot more money from an auction than what they would make from selling it through other channels. It’s not just about defects, but also about perceived value. 

    An auction gives the idea that something is worth more than it really is – and you, the bidder need to catch on the the ‘real perceived value’. 

    With a high reserve, the seller can get a premium for his property!

    Most voluntary auctions are not there for the benefit of the bidder. 

    Bank auctions

    Let’s say you have a property worth R 900 000. You’ve paid half your bond, but lost your job, your wife, your kids, your kidneys and your coffee maker. You’re far behind in payments to the bank. The bank will sometimes give you an ultimatum: sell it or we will repossess it. On auction, the final bid will be at the discretion of the bank to accept.

    In this example, if you are R 100 000 in arrears and owe R 450 000. The bank might settle for anything above R 550 000. 

    The seller will lose all your extra capital or be able to pay back the shortfall at “soft” terms.

    Bidders can by times get excellent deals from these auctions – but do your research! 

    Sherrif auctions

    In some cases, there is no way for the property owner to be rehabilitated – he might owe money for levies, rates and taxes and to the bank. After a lengthy legal process, the owner is handed over to the sheriff by a court of law, resulting in the property being put on auction. 

    These cases are generally not advertised well and often it would be only the bank present. 

    These property prices could easily go for less than 50% of the value. I personally know someone who picked up a property at 40% of market value from one of these auctions.  

    Property in possession (PIP)

    When a bank has repossessed a property, the owners might use stalling techniques to slow down the process. But at some point in time, the bank will try and get their money back. 

    These types of auctions are generally not great, as they add up all their costs, including fees, purchase price, etc. and reserve at this high amount.

    Top tips for auctions

    Before you decide to bid on a property at an auction, do the following:

    • Go to a couple of auctions first and check out how things work.
    • Do online research about the areas, properties and other factors.
    • View the properties before the sale. You will get a feel for the quality and price.

     When you are ready to bid, get the following in place:

    • Make sure you have organised your finance with the bank. Check out my free course if you need more info on home loans here! 
    • You need to pay auctioneer fees on the day of the auction, and often a 10% deposit. Make sure you have these available! Other fees such as bond and transfer fees might also be payable. 
    • Remember that you buy the property as is. You will be liable for all rates, taxes, levies, coffee bills and other outstanding fees – unless the contract states otherwise.
      • Never trust the auctioneer’s estimates. They are sometimes out by a few R 100k and it could cost you dearly

    When you’re at the auction:

    • Never bid more than what you’re willing to pay
    • Ask the auctioneer to see the contract that you would be required to sign. Do this beforehand.

    Conclusion

    When buying a property at auctions, make sure you have done your research!

    Never buy a property above market value – know what type of auction you’re going to. 

    There is a bit more to auctions than just bidding for a property and winning. Make sure you have the auctioneer fees, deposit and other required costs available on the day of the auction. Pre-arrange your funding, loan or cash before going to the auction.

    Did I mention that you need to do your research…?

    Happy investing!

    Sources consulted

  • How To Handle Complex Sectional Title Nightmares: Case Studies

    How To Handle Complex Sectional Title Nightmares: Case Studies

    Where exactly is the problem?

    I’ve heard this too many times. 

    The block sucks.

    The trustees are old and demented.

    This managing agent is incompetent. 

    I’ve been on both sides of the coin: having incompetent people managing a block where I am investing as well as being on a board of trustees and having severe issues with tenants and owners being aggressive. 

    With this experience, I want to start off with this article about who is actually at fault. We need to realise that nothing happens in a vacuum. People are involved. And the issue is not always the issue.

    To break this down, let’s talk about potential problems:

    • The tenants are not happy with the block’s management. This could include noise levels, cleanliness, upkeep of the grounds and no one does anything about it
    • An owner is unhappy with work that was done on behalf of the body corporate 
    • The trustees and managing agents are not performing
    • The levies are too high
    • Owners are left in the dark about decisions that are made

    The list of what could be causing the issues is endless. I would like to clarify some situations and what I have experienced, as well as look at some processes that are in place in case you want to take it further. 

    Case studies

    The rude owner

    We had a case earlier this year (2020) where an owner made it clear that the trustees are ‘old and should stand back’. He used rude language to express his anger and even added swear words as his bank references. The body corporate sought legal advice and warned him that if he did this again, we will start a case of crimen injuria and take legal action against slander.  

    Thoughts on the rude owner

    The body corporate and managing agent has the mandate to work for the betterment of the block. They have the interest of the block and all the owners at heart. They need to make sure that all is well managed and that the workplace is safe. As the owner, you might feel that it’s not what you’re expecting. In this case, there are some legal routes that you can take and can get access to paperwork that would enlighten you about what’s going on. 

    Remember that few things can be achieved through being rude. There are other ways, for example:

    • If you, as the owner have questions about how certain things in the body corporate is handled, send them a letter with your questions
    • As an owner (not a tenant) have the right to attend a body corporate trustee meeting. You’re not allowed to vote, but you can see what they’re discussing. You also have a right to the notes.
      • Make sure you’re friendly and courteous. Don’t be nasty, or you will be asked to leave. Don’t fight – you can end up with a court case.
    • If you’re not happy with what they are doing, you need to raise this on the annual general meeting (AGM).
      • Remember that the owners collectively needs to make decisions on the sectional title scheme. They empower the trustees to do what they need to do. The trustees will give the managing agents the authority to do what they need to do.

    Ousting the managing agent or trustees

    In some cases such as the above, it might be needed to take action and understand the situation better. If you’re looking at ousting the managing agent, but the trustees are unwilling, you will need to jump through quite a few hoops. You cannot just oust them because you don’t like them. 

    There needs to be valid, legal ground to oust them. You need the law on your side. Make sure you’re not petty – I see this a lot that people are just plain nasty for no reason. You need proper proof of gross mismanagement or gross misconduct. Follow the above points under the “thoughts of the rude owner”. This will help you to understand what the issues are. If they don’t answer your messages or they cannot answer your questions, then you would need to escalate the issue:

    • If the issue can wait for the AGM, then put it on the list of discussion points 72 hours before the meeting.
      • Note that in the AGM, generally speaking, all nominations for Trustees need to be in 24 hours before the meeting.
      • If you want to oust the managing agent, surface the issues with proof at the meeting. Let all the owners discuss this together. 
      • Managing a sectional title scheme is a group effort. Everyone should agree that something is an issue and that it should be addressed.
    •  If the issue cannot wait for the AGM, then get 66.6 % of the owner’s signatures and get order an emergency meeting. You can oust the trustees or managing agent in these meetings.
    • If the trustees are not responding, you can seek legal advice and get a court order to oust the trustees and managing agent. I personally have not seen one block doing this successfully, but it is possible!

    The incompetent managing agent

    I had a friend who bought a place in a very nice up and coming sectional title scheme. He paid about R 1 500 in levies, which was well priced. The odd thing is that the managing agent didn’t want to schedule an AGM. 

    After the trustees/owners forced the managing agent to hold an AGM, it surfaced that there was a water leak now for three months, costing the body corporate R 500 000 per month, that the managing agent gladly handed over to the municipality. 

    The scheme had no more money in the emergency fund left. 

    When questioned about this, the managing agent representative got up and left. 

    The managing agent is empowered by the trustees to manage the block. The above is gross mismanagement. In the above scenario, there is a court case pending about gross mismanagement and I am looking forward to the outcome. 

    Thoughts on the incompetent managing agent

    It is essential that the owners/managing agents/staff communicate to the trustees through the channels set up so that they can be made aware of what is going on. 

    • Complain about the things that are worth complaining about: I have historically also heard owners complain about the way pots are being painted it how Mr Espresso from down the hall made a rude hand gesture towards them – this is not of the concern of the trustees and needs to be handled between the people themselves.
    • In some scenarios, things happen without the knowledge of the trustees. The trustees give the managing agent the right to handle some things on their behalf. If needed, send a letter through the given means to ask for clarity about why certain things are done.
    • It’s a legal requirement to have a maintenance plan and emergency fund for all sectional title properties. 
    • The body corporate should take legal action against illegal activities. 
    • If the managing agent is incompetent, then the trustees should practice their legal right (as the body that employed them) and/or this needs to be handled at the AGM. 

    The licentious caretaker

    I’ve been in the situation where the caretaker would do certain things that made the management of the block exceptionally difficult:

    • He took long breaks from work, such as travelling with his girlfriend during work hours.
    • Lightbulbs were bought at 3 times the price and did not follow proper procedures when doing procurement.
    • He was unreachable during work hours. 

    Thoughts on the licentious caretaker​

    The board of trustees employ people to move the block forward. This means that the cleaners, caretaker and gardeners are employees of the body corporate. As with any employee-employer relationship, the terms should be clearly defined:

    • Each employee should have a job specification, i.e. what is expected from them
      • Salary, bonuses (if any), leave days and availability should be set out in this document
    • As with any employee, if there are issues, the employer (which is the trustees that the body corporate empowered to make the decisions) should address them. This might mean written and verbal warnings followed by dismissal for qualifying offences.
    •  If one cannot prove the allegations, it is important to get proof, as some cases do escalate to the CCMA.
    • The trustees and managing agents should defend all staff members against abuse and bad behaviour towards them. Yet, the caretaker should still do his job such as addressing owners and tenants that break the house rules.

    How to deal with sectional title scheme complaints

    If you encounter an issue in your complex, like noisy neighbours or unattended maintenance, the Sectional Titles Schemes Management Act outlines a process for raising and resolving complaints. The first step is to put your concerns in writing to the trustees, the elected representatives who manage the complex. They’ll investigate your complaint and try to find a solution. If they can address the issue to your satisfaction, that’s fantastic! But if the problem persists, you can request to attend a trustees’ meeting to discuss it in more detail. Hopefully, a solution can be reached during this meeting.
    If the trustees’ meeting doesn’t solve the problem, you’ll need to wait until the next Annual General Meeting (AGM) to bring it up again. Here, you can present your complaint to all the owners in the complex and hopefully get a majority vote in your favour. If the AGM resolves the issue, then you can finally move on. However, if the vote doesn’t go your way, you are legally allowed to escalate the issue to CSOS.

    Your last option is to seek legal advice from someone familiar with sectional title.

    I’ve seen many people holding meetings and attempting to collect signatures of 66.6% of owners to can call for an emergency meeting to address your specific concern, however, this has never come to fruition in my experience.

    It’s everybody’s fault

    I have noticed that no one wants to take the blame when something goes wrong.

    The body corporate will always blame the tenants and the tenants will always blame the trustees.

    When the levies go up, it would always be because of bad management. And sometimes it is. But sometimes costs do go up.

    As a collective scheme, everyone needs to work together. It is thus important to join with everyone else into making your a investment good one.

    Conclusion

    In some cases, you need to take legal action. In my personal experience, it’s better to settle the matter out of court – which is 100% possible.  

    The trustees need to be involved in their investments. 

    The owners need to take responsibility and help the caretaker by adhering to the house rules.

    Managing agents need to take the trustees and owners seriously. They need to manage the block well.

    Happy investing!

    Sources consulted

  • How To Invest In Property With Family Or Friends

    How To Invest In Property With Family Or Friends

    Invest with others

    Imagine that you’re able to buy property. 

    With other people.

    We know that property affordability is a huge problem in South Africa. With a high barrier to entry, it is difficult for the normal person to invest in property.  

    I was in the same boat a few years ago. The way that I navigated around this was by joining forces with my father and sister. We bought a property together and shared all the costs, and all the income. 

    Like a page from my journal, I would like to share some ideas, lessons and options that you have to invest with other people in property. 

    Why would I want to invest with others?

    Here are some reasons why it makes sense to invest with other people:

    • Affordability – not everyone can afford to buy property
    • Risk – imagine sharing the risk of tenants not paying and initial input costs   
    • Skill – in many collaborations, one person brings skill, another brings money. Property is no different. If you know someone being skilled in finding tenants, handyman work, etc. then this might be an excellent find
    •  Diversification – don’t have all your eggs in one basket. If you share the investment, you can invest other money in other places – thereby diversifying your portfolio.

    Stokvels

    In South Africa, we have stokvels – a collective buying scheme, where everyone contributes. Though I am not an expert in property stokvels, I believe that the below points are also applicable to stokvels. 

    When you do buy a property with people you don’t know, there might be more complex exit clauses. For example, there might be a clause saying that you can only exit the scheme after 5 years, as to keep the investment safe from many shareholders selling and causing cashflow issues.

    Sharing income and expenses

    The main question when buying property together is how do you divide the ‘shares’? For example, if one person brings money, and the other brings skill – how do you decide who gets what?

    This is a very complex question, but I would like to give you some guidelines. I will use the term ‘shares’ here in the context of ‘your share of the cake’:

    • How much value does the other person(s) add to the deal?
    • Could you do it without them? What difference would it make?
    • If all parties bring finances to the table only, how could we break it down to be fair? For example, if one has capital now, and the other has monthly cash flow, will this be a loan agreement of sorts where the share becomes more over time?

    When it comes to shares, splitting income and expenses, and making money, no one can claim a silver bullet. I have however thought to add some examples of how you can split it:

    • 3 people each bring 33.3% of the cash – 33.3% shares each
    • 1 person brings a lump sum, 2 people bring monthly cash flow – starting off 1 person 50%, others 25% each. After 5 years, 33.33% each
    •  1 person brings funding and one person brings skills such as fixing and flipping. 50% each.

    Legal things

    People are strange things. They change original agreements in their head. It is recommended that

    • all communication is done in writing.
    • Have a contract in place to explain the details of the deal – costs, fees, breakdown and distribution of income

    When buying the property, you can buy it in your name(s), a company or in a trust. I know I’ve written an article about companies, trusts and in your own name (article found here), but really want to touch on it in this article.

    If you’re planning to keep the property in the family forever, a trust will make sense. As you cannot own shares in a trust, make sure that you have a contract about how the expenses and income will be managed. 

    If you’re only a few people (2-3), then you can register the property in your own name. If one person decides to back out, this will be very difficult to sell their share.

    A company on the other hand can also own the property. If you want to sell your shares, then you only sell the shares of the company, and not of the property itself. 

    With this in mind, make sure that you have a separate account for the money coming in and going out. It will just be easier if there are questions about money.

    Warnings and clauses

    The property with my family worked out really well and they are awesome. 

    Yet this is not the sweet case for every one.

    Exit clauses are important. What happens when one party leaves? What if they leave before they should, and now you have to pay for all the fees? Make sure you cover your back! 

    Here are some exit clauses to consider:

    • An investment is only sold if the majority votes to do so.
    • Any changes to the shares need to be approved by all members.
    • In case of default (i.e. a shareholder cannot pay his dues), his shares are penalised by x.
    •  A shareholder can only exit after x time
    • When a shareholder wants to sell his shares to someone else, it needs to be approved by all/some of the shareholders.

    Conclusion

    Collective buying in investment property can be very beneficial. 

    For peace of heart, have legal paperwork in place to protect the deal.

    IF you choose to invest in a stokvel or with a property company, make sure you understand the impact of wanting to sell your part.

    Happy investing.  

  • How to get a home loan – the process

    How to get a home loan – the process

    Not everyone can afford to buy property in cash. 

    Some of us need some help by getting a loan from a bank.

    Other people want to help the bank finance an investment property.

    If you’re looking to get a loan from a bank, then this article will give you a bit more information about what the bank submission process is.

    Before you get to the OTP phase, you will need to get a lot of things in order. To help you on this journey, I have created a FREE short course with videos and articles for you to use. Check the link here! 

    Once you have an offer to purchase, you will need to get a home loan. The offer to purchase is the basis for propelling the process of home buying forward.

    Choices: a mortgage originator or self-submit?

    Depending on your offer to purchase, you might want to use a mortgage originator. What they do is so much simpler than their name – they submit your application to all the banks and can give you feedback on interest rates and terms and conditions in a much easier language than big corporates. 

    They also know the process, thus they often can help a clueless person to get a better deal than going to the bank themselves. 

    Do I recommend using this free service? Well, it is free 😉

    From my experience, your own bank doesn’t always give you the best deal. For this reason, it might be worth it to explore other banks’ offers as well.

    Submitting to the bank

    Depending on the OTP, you can have between 7 and 21 days to get a home loan. You will need to make haste, as the clock starts ticking once you’ve signed the OTP!

    You will be required to submit paperwork – and loads of it. 

    Here are some of the things that you need to have ready:

    • Certified copy of your ID
    • Proof of your income tax number
    • 3 x months bank statements
    • 3 x months payslips
    • Proof of your current address
    • OTP signed by both parties
    • Bond application form

    Once you have all your paperwork in place,  you are able to submit all the details to the bank. If the mortgage originator is handling it for you, it’s done automagically.

    Additional paperwork

    Depending on your unique financial situation, you might be required to submit additional paperwork.

    For example:

    • If you’re planning on buying the property in a company, you will need to submit audited financial statements, registration details and info on the shareholders.
    • If you are planning to buy the property, but are married in community of property, you will be required to submit the details of your spouse as well
    • In the case that you are politically connected, some banks might request a full disclaimer with proof of where you’re getting your funds from.

    Bank responses

    Once you’ve submitted it, the bank will do some interesting things with your application. These include:

    • Checking your affordability
    • Doing a credit check on you and scrutinising all your debt
    • Interest rate calculations – they will calculate this by looking at factors such as job title, education, length of stay at your current job, marital status and credit score.
    • Doing a stress test – The bank wants to see if you’re able to afford the loan even if interest rates might rise substantially, your existing debt becomes more, etc.

    Sometimes the bank sees that there are still some documents it requires to make a decision such as the books of the block of flats.

    Once all of this has been done, the bank will respond with one of the following:

    • Approved in principle – As a provisional grant, there might be some checks that they want to do first. This includes sending out a property surveyor or getting the books of the body corporate checked out.
    • Formal Grant/Final Grant – This is the final quote that the bank will send you. This will contain the terms and conditions, loan amount, interest rate and other legal details that will be written down. The bank might offer you a lower amount than what you asked for!
    • Declined – The bank has declined your application. In most cases, the bank will tell you why it’s been declined.

    Special conditions

    The bank can also supply you with a conditional grant. These responses might include:

    • Before the loan is officially approved, first sell an existing property.
    • Certain statements (such as audited company statements) are submitted to the bank and approved by them.
    • You move your transactional accounts to the bank
    • The bank gets notified if certain details of the trust or company that’s buying the property changes.
    • Life insurance – in many cases the bank wants to know that if you die, they will not run into financial issues. Historically, only disability (quadriplegia) and life cover has been required.
    • Building insurance  – in some cases, the bank might require you to have building insurance. 
    • Retrenchment cover – with the rise of certain international pandemics, the banks try to cover their investment defaults by forcing many individuals to get retrenchment cover. The reason for this is that certain industries are subject to higher risk of job losses. 

    Are you able to negotiate special conditions? It depends on the condition. For example, I have once disputed a clause and the bank removed it.

    Make sure it’s worth the fight! 

    Why has the bank declined my loan?

    If the bank declines your application without a reason, ask them why. Here are some of the biggest reasons why a loan is declined:

    • Affordability – you’re not able to afford the property 
    • Credit score – you have some issue with your credit that is stopping the bank from giving you the loan
    • Overexposure – the bank has too much debt in the sectional title block or area. They are legally regulated with how much debt exposure they can have.
    • Body corporate health – the block is financially bankrupt and the people have not been paying levies. And the bank does not want to be part of it.
    • Overpriced – The bank does not believe that the property is worth what you’re paying for it. 

    Accepting the final grant and attorneys

    When you accept the final grant, you need to let the transfer attorney know that you’ve received a loan. In some cases, you send the grant through to the estate agent who sends it through to the transfer attorneys. I prefer not to share any personal information (as far as possible) with an estate agent – why should they know about my personal financial situation and investment properties? 

    Once the bank receives your response on accepting the final grant, they will instruct a bond attorney to get the ball rolling. The bond attorney will call you within a week or so to come and sign paperwork and pay them their fee. 

    The transfer attorney will do the same – sign their forms and pay their fees.

    Remember – always negotiate their fees! Ask for a discount! 

    Registered

    Once everything is signed and sorted, the documents will be submitted for registration. 

    Once a property registers, it’s yours!

    Conclusion

    Loans with banks can be confusing with loads of paperwork. 

    The amount of legal red tape that has been created is staggering. 

    Just give the bank everything that they ask for.

    And ask questions if you’re not sure.

    Happy investing!

  • How To Invest In Property Without Buying It Physically

    How To Invest In Property Without Buying It Physically

    You don’t like bricks and mortar

    So, you want to invest in property. But you don’t want the burden of having a single property in a single location or the effort of managing it?

    Well, there are options. 

    You can invest in property without buying one. 

    Many years ago, you had to go through a very expensive broker or know someone who knows someone so that you can buy shares in their non-listed company. 

    With technological advancements, this has been simplified greatly with lower fees, opportunities for non-listed property and even property stokvels. If you’re looking to invest in property shares South Africa, there are several options available to you. One popular way to invest in property shares South Africa is through real estate investment trusts (REITs).

    Real estate investment trusts (REITs)

    A real estate investment trust (REIT, pronounced REET) was first legally created in the US by president Dwight Eisenhower (1960). He created the legal structure so that normal people can invest in a well-diversified portfolio. Previously many people invested in stocks and bonds, but property as an asset class was challenging due to the barrier of entry.   

    So what is a REIT? It’s like a fund. People put their money together, and they buy real estate with the money. The property is generally rented out, and the people owning the ‘shares’/units will earn money after all the fees and bills are paid. 

    Many REITs are listed on a stock exchange. As real estate is all about who you know, you REITs often partner with other property companies for all their property needs. For example, a REIT might have as their partners an architect, builder and leasing agent – that is if they don’t do these in house. 

    Many REITs have mortgages at different banks so that they can leverage debt. It’s thus important to check out the debt/equity ratio.

    Because of the contacts and economies of scale,  REITs should be more profitable than many everyday investors. Sadly, there are lots of fees that eat away at the profits. 

    REITs and tax

    REITs are taxed at your normal income tax rate. You will be taxed accordingly on all income you get from the REIT. 

    Does this make you sad?

    Well, this means that if you’re in the 30% tax bracket, and you earned R 100, then SARS will take R 30 as their own. 

    Dividends tax will not be payable.

    Investing in listed companies

    DON’T BE STUPID
    Don’t invest your life savings in single stocks. Diversify. Do your own research. I mention names for the sake of examples. I don’t condone them or invest in them.

    Though a bit riskier, it’s possible to invest in single companies that serve the property industry or own property themselves by buying shares. There are quite a few to choose from, including construction and engineering, and companies that actually own property. 

    Some of these companies include Growthpoint Properties Ltd and Redefine Properties Ltd.

    It’s worth researching this thoroughly, as you do not want to invest all your money in a single company, just to lose all your money. 

    Listed companies and tax

    When investing in shares of these companies, the normal tax rules apply.

    If you get dividends, you will have to pay dividends withholding tax (20%) which is already deducted before you get your money.

    If you decide to sell your shares, the calculation is a bit more complicated. Check the article here for those calculations!

    Investing in non-listed companies that own property

    A few years ago, this was a dream for many people. With companies such as EasyProperties, you are able to buy shares in a company that owns real estate.

    These differ from listed companies, as they are not listed on a stock exchange (stating the obvious). They do not have to comply with the JSE rules on market cap and stock market legislation, giving them the freedom to invest in smaller investment opportunities that could yield higher returns.

    These companies could pay a dividend monthly, quarterly or annually – or not at all. There might also be some rules on when a share holder will be able to buy or sell their shares.  

    Non-listed companies can be another way to invest in property shares South Africa. These shares may also be accessible through non-listed companies that focus on the property sector.

    Non-listed companies and tax

    When investing in shares of these companies, the normal tax rules apply.

    If you get dividends, you will have to pay dividends withholding tax (20%) which is already deducted before you get your money.

    If you decide to sell your shares, the calculation is a bit more complicated. Check the article here for those calculations! Certain rules might apply to when you’re allowed to sell the shares, such as once in a quarter or after 2 years. This is needed for liquidity and managing supply and demand of all the shares., 

    Property Stokvels

    In South Africa we also have property stokvels which can be another way to invest in property in South Africa. The way this works is everyone in the stokvel contributes to a fund. Here are a few examples of different stokvels. The members contribute to the stokvel –

    • Every month one person gets a large amount from the fund to buy the things they need.
    •  The money is invested in the stock market for a set time and then cashed out and split according to what everyone contributed
    • The money is invested and used to buy real estate. Each member gets shares depending on how much they contributed. The rent is paid out to the members in an agreed interval or reinvested.

    Stokvels force people to save. There is normally a legally binding contract in place that will table the requirements of how much should be invested, outcome, timespan and other details. 

    These stokvels could be managed by a company, a friend or a lawyer. It is recommended that you only invest in a stokvel with people you trust – or legally regulated.

    Conclusion

    We really have many opportunities to invest in property that is not physical property. Some of these include listed property (both owning property and working with the property industry), unlisted property, REITs and property stokvels.

    If you really don’t want to own property – that’s okay. 

    You can still invest in property.

    Happy investing.

    Sources consulted

  • I’ve found the property that I want to buy. What now?

    I’ve found the property that I want to buy. What now?

    So you’ve found the property of your dreams (either one you want to live in or an investment property). 

    Well done!

    But what happens after you’ve found it until you’re able to move in and call it home? The process works something like this:

    • Put it in writing that you want to make an offer. This is called an offer to purchase.
    • Secure funding – If you’re a cash buyer, you need to pay an amount into the transfer attorney’s trust account. If you need a home loan, you need a final grant from the bank that your loan has been approved.
    • Sign the paperwork at both the bond and transfer attorneys – and pay their respective fees
    • When both the attorneys agree, the transfer attorney will submit the transfer documentation to the deeds office.
    • The property registers, and you become the new owner.

    Negotiations and the offer to purchase (OTP)

    Once you’ve decided to buy the property, you need to negotiate the terms and conditions. In many cases, the agent will verbally negotiate with the seller and in other cases, they prefer having an official offer to purchase. 

    It is in this phase that you need to negotiate the terms and conditions of buying the property. In many cases, issues like these are not picked up until after moving into the property:

    • The electrician issued an illegal COC – the geyser is leaking an ocean on the DB board
    • Buildings on the property are not on the plans that the council has
    • The roof trusses are rotten to the core and need replacement
    • The levies that the agent declared are incorrect

    Once the verbal negotiations have been completed, a legally binding document will be signed to make the offer official. This is called the offer to purchase. For more about the OTP, see the article here.

    Paying for the property

    The OTP will table the amount of time you have to deliver on the promise of paying for the property. You have a few choices here.

    • Are you paying cash? 
    • Will someone else be supplying the money to buy the property?
    • Do you have investments (or property) that need to be sold first before you will have the money?
    • Will you need a bond?

    If you need a bond, the OTP will specify a cut-off date by which you are required to have approved funding for the property. If you cannot secure funding or there are issues, the deal will fall through. Depending on the contract, you might be liable for damages – so don’t just wait the time out!

    In case you’re a cash buyer, a date will be specified where the monies should be paid.

    If you’re a cash buyer or will pay a deposit

    In some cases, you might have the money in your back pocket (just next to the Kopi Lawak coffee beans). In this case, well done! Not many people have cash on hand for property! You might also have to pay a deposit and/or wait for an investment to clear before you’re able to pay for the property. 

    Never, ever ever ever transfer money to the estate agent. Did I mention never to do that – you should never ever give the estate agent the deposit?

    Once all the paperwork has been sent to the attorneys, you will be contacted by the transfer attorney who will give you details of a trust account into which you can deposit the money.

    If you need a bond

    In most cases, people need a home loan. Most estate agents will add a clause in the OTP that they will assist you in getting an offer from the bank. The reason they do this is that they get a commission from the bank in the form of a kickback – at no cost to you.

    Should I use a mortgage/bond originator?

    A mortgage (or bond) originator is a company that submits your OTP and other legal documents to all the banks on your behalf. They know the system really well, and able to negotiate better rates with the bank.

    Can you do it yourself? Yes!

    Are you able to submit to the same banks as the mortgage originator? Yes! But they don’t like that, as they have competition then 😉

    Stealthywealth has famously compared the two and got mixed results concerning where to get the best offer. I do think using them is a good idea – and if you want to submit to your own bank yourself, why not?

    The attorneys

    Once you have the money guarantees all sorted, you can now proceed to the paperwork and legal stage. 

    The attorneys have loads of documentation that they need to have you sign. So, start practising your signature!

    The bond attorneys

    If you’re a cash buyer, skip this part – you will not be having to deal with bond attorneys!

    Once you’ve accepted the bond from a bank, they will appoint a bond attorney. Some banks allow you to choose from their list of pre-approved attorneys. The bond attorneys will handle the bond and have you sign a legal contract between you and the bank.

    Once signed, they will let the transfer attorney know that the bank is happy and ready to submit the deal.

    The transfer attorneys

    The transfer (or transport) attorney handles the transfer on your behalf. You will also need to sign about 4 000 000 000 legal documents to prove that you drink filter coffee and not espresso.

    The transferring attorney will also wait for other paperwork such as the certificate of compliance for electricity and gas (if relevant). 

    They also will need closing figures from the municipality and body corporate/housing association. Then proof needs to be submitted to the attorneys that the seller has paid all the bills. For example, if the rates and taxes are not up to date, then the deeds office will not allow transfer.

    Submitting

    Once everything is ready (including paperwork and bond attorneys), the attorneys will submit to the deeds office. 

    Depending on the deeds office, this could take anything from three days to the next coffee harvest. 

    Once it’s registered, you will get a call from the attorneys or an SMS from the bank to say the transaction has been completed.

    And then the property is yours!

    Why is the process taking so long?

    Sadly, it’s never just ‘sign and submit’. This process can take anything from a week to years, depending on certain variables. For example:

    • A property is part of an estate. The will and testament is disputed by the children. This can cause considerable delays in the process.
    • If this is a repossessed property, the bank needs to pay for the closing figures and then again for settling the outstanding fees. The bank can easily take a month to pay out the monies. Once they’re ready to pay, the closing figures might have expired. New closing figures will need to be requested, starting the infinite cycle all over again
    • The OTP has a conditional clause that another property need to be sold first. The deal will lay dormant until the property has been sold. 

    Conclusion

    The OTP is the start of the legal process of buying a property. 

    You will need to jump through many hoops, sign billions of documents and pay some interesting fees to make the property yours. 

    Happy investing!

  • Make money using Airbnb or guesthouses in South Africa

    Make money using Airbnb or guesthouses in South Africa

    We have the house, so why not use it?

    Many people that have a spare bedroom have considered renting it out – whether through Airbnb or by opening a guesthouse. It might be some extra free cash in your pocket!

    In this post, I would like to look at the basics of renting out rooms for the short term through Airbnb and as a guesthouse. There are quite a few things to consider, so let’s jump in

    The crux strategy for guesthouses and Airbnb renting in South Africa

    The core strategy is simple: rent out a room in your house for an evening and cha-ching! In rolls the money. 

    Having said that, it’s worth thinking about:

    • What do you want to do with the property in the long run? Will this be your primary residence? Are you considering selling this property in a few years’ time?
    • Do you want to pay off the bond with your profits? What will you do once your goal is reached?
    • Will you plan on selling the guest house business once it’s grown to a point? When is this projected to happen? 

    Is this for me?

    The Airbnb and guesthouse strategy is not passive. Quite a lot of involvement is normally required. Even if you have someone managing your business, you still have to manage them!

    When renting out a room, the host needs to be available for greeting and welcome guests. They also need to be there in case there are questions such as directions, local sightseeing help or where to find the closest coffee shop. For this reason, it’s ideal for a housewife who loves staying at home or a student that has a spare place in their living room. 

    It’s also nifty if this housewife’s husband (or son) is a handyman so that he is able to fix issues such as burst geysers, tap leaks or a broken mirror. 

    Considerations

    Here are some things you would need to consider:

    • Calculate the costs – see the sections below
    • Reputation – make sure you are using reputable websites and agents to get heads on beds
    • Location – you need to be in the right location 
    • Listing price – do your research!

    How do I get started?

    • Understand the regulations that govern the sites on which you will be advertising such as Airbnb and Booking.com. For example, if you cancel a booking, you could be penalised!
    • Preparation – you would be required to prepare rooms for your guests – bedding, coffee and tea, etc would need to be accounted for.
    • You would of course need to furnish the property 
    • Involvement – as mentioned above, you would be required to have more involvement 

    It’s this recommended that you make sure that your calculations match your returns.

    Costs: What do you need?

    The whole project of creating a guesthouse or becoming a host with Airbnb is focused on making money. You need to make sure that it will be profitable. You want to reach the point where your venture will be profitable as early on as possible. 

    The little block that can make the difference between profitability and disaster is “list of renovations, costs and overheads”. This is a black hole. For this reason, I have added a list below for you to consider:

    • Refurbishments and enhancements – many guesthouse guests are accustomed to having their own en suite bathroom. 
    • Furniture and appliances – it’s standard for guesthouses to have hairdryers, televisions and a bed. Airbnb can get away with an air mattress.
    • Indirect costs – the electricity used by guests and geysers as well as washing the bedding every day all have a cost impact. The linen might need to be replaced often!
    • Extras –  As a guesthouse, you would often be required to supply soap and shampoo. For many Airbnb’s, this list could also include tea, coffee, wifi and breakfast.
    • Marketing costs. Airbnb and Booking.com take fees from your listing price. If you’re looking to advertise locally or use an agent, there will be a cost impact on your profits.  

    Tax

    The tax structures of guesthouses can get very complex. Many guesthouses are in a trust or company – and they run it as a business.

    In most cases, you will run Airbnb in your own name. The profit that you make will need to be declared to SARS. It will form part as your PAYE income and fall in the appropriate income bracket. 

    Whichever structure you’re using, remember that you’re running a business. 

    All expenses need to be accounted for, as is all income. If you have cleaning staff, buying coffee and tea for your guests, or if they use the wifi – deduct these from tax. Only deduct from tax which helps your business to function.

    Conclusion

    You can make money through guesthouses and Airbnb’ing your rooms out. 

    Make sure your location is perfect.

    Make sure you have a done all your market research before you spend money.

    Don’t just think it’s going to be awesome – PLAN!

    Happy investing!

    Sources consulted

  • Should I buy my property in a trust, company or in my own name?

    Should I buy my property in a trust, company or in my own name?

    What legal entity should I buy my property into?

    The question of whether to buy a property into a trust, company or in your own name is one I get exceptionally often. Many people want to know what the pros and cons are, the cost-effectiveness and why people are even bringing this conversation to the light. 

    The reason for this important question is due to the far-reaching consequences:

    • Liability – What happens if someone takes legal action against you or your business?
    • Tax – there are different tax rates and implications for all the structures.
    • Admin costs – some entities have higher running costs and some are more time-consuming.

    Note that I will refer to the choice below as ‘entities’ – a company entity, your own name (as an entity) and a trust entity. 

    What is the goal of your property?

    I am sure you’ve heard this one. People (especially lawyers, estate planners and financial advisors) love using big words such as goals, mission, vision, and strategy. Yet, in the context of choosing the right structure, you need to take these into account as the impact can stretch much longer than your lifetime. 

    Let’s get started to narrow down some questions that will help you in establishing your needs:

    • What type of property do you want to put into the entity?
      • Primary residence
      • Holiday home
      • Investment property (residential, commercial and/or industrial)
    • Is this property for your use, rental use or your business? 
    • Are you planning on selling the property in the next 10 or 20 years? 
    • Will the property change its purpose in the next few years, e.g. primary residence to rental property or residential to commercial/offices?

    With these answers in mind, you can now compare the answers to the below structures. 

    Buying property as a company

    The CPIC allows you to register a company (a Pty Ltd) and run a business. This business could be a property business or/and something else like selling coffee. 

    The goal of a company is to distance your personal interest from your business interest and have less liability on you personally. What this means is that if your company gets liquidated, your personal belongings could still be kept safe from creditors. This is why In the US they call these LLCs – limited liability companies.

    As you’ll be running this business like a business, your mission will be to make money. It would therefore not make sense in most instances to buy residential in a company. 

    Money and tax implications

    If you want to move money between yourself and the company, you would need to do so in a methodical way to show your auditors what you’ve been doing. You need to submit these audited statements of income and expenses to SARS so that you can pay the necessary tax. 

    To get the money out of the company, you have a few options: you’re able to pay yourself a salary (for management) or invoice the company for work done. Please make sure that this is done legally – consult your tax consultant!

    If your company makes a profit, you will need to pay tax. All profit in a company is taxed at 28%, as dictated by SARS. 

    If you pay yourself dividends from the profit, you will need to add another 20 % dividends tax on top of the company tax.

    When selling a property, you will be liable to pay capital gains tax (CGT) – 18.6%. If you want to pay out that money into your own pocket, then you will be paying dividends tax on top of that.

    You might often find shareholder loans on the audited statements of a property company to cover some of the (initial) property costs such as bond and transfer, deposit and bond shortfalls. If at a later stage you want to withdraw this money, you are able to do so, as you’re just paying back the loan to yourself. 

    Many property companies run at a loss. They do this to avoid paying tax legally. An example is having a bonded rental property where your expenses are more than your income. For more info on this, check my article here!  

    Deregistration

    It’s not just the auditors and SARS that need to know about your company and profit. You need to submit annual returns to the CPIC. They need to know if the company is still alive and going well. This quote by Riaan van Deventer was so strong, I decided to copy and paste it as found!

    “Don’t always presume your auditors will bring this to your attention or submit these annual returns. The onus and responsibility is fully on you as the director of the company ((Pty) Ltd) or as a member of the close corporation (CC) to ensure your company’s annual tax returns have been submitted on time. Ignorance of the law is no excuse, and you need to be aware of the requirement for submitting annual returns with the CIPC to avoid de-registration of your company.”

    –Riaan van Deventer, Head of Real Estate at Engel & Völkers Southern Africa

    If the CPIC deregisters your company because they didn’t get the needed communications, there are exceptionally painful processes in place to reinstate a company. Note that it is time-consuming and will make you cry non-stop for quite a few months, if not years. It is therefore recommended that you stay compliant.  

    The advantage of buying property under a company name in South Africa

    Remember that a company is a separate entity from yourself. For this reason, it reduces your legal liability in case something terrible happens to your property.  To further distance yourself from your property, some people create a trust that owns a company – but let’s first look into trusts.

    Buying a property in a trust

    Trusts have been around for about 200 years in South Africa. The name might be misleading, but conceptually it’s not a difficult thing to understand. 

    When you create a trust, you are creating a legal entity that is not connected to you. Because it’s not connected to you, its assets are kept safe from your tax rates, liabilities etc.

     A trust has trustees and beneficiaries. Trustees are the people that run the trust – think of them as the board of directors. Beneficiaries are people that benefit from the trust. If the trust makes money, beneficiaries get money!

    As with a company, if the trust doesn’t pay for the property, you need to create a loan between you and the trust. There will also need to be a loan agreement in place if your property is not used as a (primary) residence. 

    For more info, Brendan Dale did an excellent article on properties and trusts here.

    SHould I buy property in a trust?
    Tax Breaks For Investment property

    Money, tax and estate planning

    The South African law on trusts does not set a time limit for trusts. It is for this reason that it’s able to withstand even your death and be used as an estate planning tool. In short, to explain the impact, you will be liable to pay estate duty, capital gains tax (on e.g. property) and executor fees – which are often a percentage of gross assets before liabilities are deducted. 

    Many people will over time put all their possessions in a trust, including their properties (investment and residence) to avoid paying these taxes.

    As a legal entity, a trust still needs to have its financial statements drawn up annually. If a profit is shown, you need to pay tax. All profit is taxed at 45 % (as of 2020). 

    If the income is distributed to beneficiaries, then they will be taxed according to their individual income tax brackets. 

    Comparing a trust vs a company for property​​

    With trusts, being taxed much more than companies, it could make sense to add your investment properties in a company, so that you can sell the whole lot with the company. Depending if you’re planning to use Section 13SEX of the tax act, it might still make sense to keep it in a trust for the time being. I do recommend getting advice from a property expert in this regard.

    What if I registered the property in my own name?

    You are also able to register a property on your name. This could be beneficial if this is your primary residence or if you are planning to sell the property within the next few years. If this is your primary residence, you will get a nice capital gains tax break when you sell, yet on secondary (investment) properties, you will liable to pay some taxes.

    From a tax and cost perspective, it makes sense to have a property on your name if:

    • You’re not planning to die
    • Sell the property before in the medium term (less than 10 years)
    • Not leave a huge legacy to people – the government will cash in on your assets!
    • The property is used for residential purposes and you don’t anticipate that this will change
    • You don’t run the risk of being sued  

    After reading this, you might think: is it a good idea to have any investment property in your personal name? If you have established that you will keep the investment property for a shorter period of time, then it might make sense from a tax perspective to register the property in your own name.   

    Money, tax and estate planning​

    What happens when you die? 

    Everything that you own will go into a ‘fund’ called your estate. You will need to pay fees for everything including:

    • Executor fees – they easily charge 3% of your gross assets before all expenses and liabilities are deducted)-
    • Capital gains tax on your property of roughly 13 %,
    • Estate duty – you will need to pay the government a fine for dying. For every rand above R 3.5 mil, you will need to pay 20%. In essence, if you’re in the top tax bracket, then having too many assets in your own name will not be tax efficient.

    You owning Trusts owning companies

    To give yourself as little liability as possible, it would make sense to let someone or something else own your properties and allow you to benefit from them. Generally, it’s acceptable to register both a trust and a company and structure it in the following way:

    • The company issues 1 000 000 shares. You own 1 share and the trust owns the rest.
    • You are a trustee, have an independent trustee and are a beneficiary of the trust.

    As you technically don’t own the company or the trust, it makes sense that you can distance yourself from these structures financially and legally – yet you control the trust, and indirectly the control of the company.    

    Can I transfer my property to a different entity?

    Section 42 Asset for Share allows you to transfer investment properties from your own name into a company. There are a few catches, however. You need to keep the shares for a minimum of three years, and it’s only available for investments that generate income. For example, you cannot transfer IP or gold into the company, as it doesn’t generate cash.

    Transferring a property from a company to a trust or your own name to a trust can be a bit more complicated. You have a choice – either donate the property, which triggers donations tax, or sell it to the other entity. The second option can allow for it to pay you back what it owes you. Please check with your tax advisor, as you might be liable for capital gains tax on your rental property. You will also most definitely pay transfer and attorney fees – and possibly transfer duty.

    Conclusion

    The entity that you decide to register your property in depends on your strategy.

    If you’re planning to grow your property investments and/or have the risk of legal action, it is best to register the property in a trust or company.

    If you are planning on flipping the property in a few years, it might be more beneficial to register it in your name.

    I encourage you to do your math. 

    Don’t trust people’s opinions.

    Happy investing!

    Extra reading

  • How To Negotiate Interest Rates For Your Home Loan

    How To Negotiate Interest Rates For Your Home Loan

    Negotiating your loan interest

    Most people don’t like negotiating (especially interest rates for your home loan) – yet sadly in a capitalist society, we need to, if we want the best deal. Interest rates are small numbers with a huge difference. In the example below, Maya Fisher-French (form Maya on money) explains the small difference:

    If you manage to get a 0.25% reduction in your mortgage rate, the monthly saving may seem small. For example, on a R1 million mortgage a 0.25% reduction will save you R165 per month. Over a full 20-year period that would save you R39 600.

    Before you get a home loan

    Many people don’t know it, but you can do quite a lot from your side to get a better interest rate – even before you apply for one! Here are some things you can get in place:

    • Credit score – you get a free credit report every year from all major credit bureaux. Use it to clean up your credit score.  
    • Deposit – saving for a deposit will allow you to negotiate for a better interest rate, as you have something to lose as well!
    • Salary/Income/Job – The length of time at your job and steady income will count in your favour once applying.

    Negotiating when applying for a home loan

    Everyone knows the bank has a secret list. They take all the things on this list and add it into the magic machine, which in turn will give you a result of how much your interest rate will be.

    It is therefore imperative when applying for a home loan, to give the bank as much information as possible so that the bank can make an informed decision. We know that the following are on the list:

    • Level of education
    • Employment length
    • Disposable income and expenses
    • Credit rating – credit score, defaulting of debt, debt review, summonses etc.
    • Property purchase price – is this market-related? If this is undervalued, they will be willing to drop the price.
    • Deposit – I use this as my final trump card – I personally apply for a 100% loan, and after their final offer, I negotiate what the interest rate would be if I paid, e.g. a 15-20% deposit. 

    Remember: the banks are there to make money – and they want to do so securely with the lowest amount of risk possible. It’s worth mentioning that some banks (especially FNB) will give you a discount on your interest rate if you move your transactional account to them. They even will give you a discount if the amount is not taken from your bank account, but directly taken from your employer to the bank. 

    Negotiating when you have a home loan

    When you have had your home loan for more than 24 months, you are able to negotiate your interest rate. In general, some banks (specifically Standard Bank) do not negotiate the interest rate once the contract is signed. 

    With other banks, there are a few ways you are able to negotiate:

    1. When you have paid more than 15 % of your home loan and have been paying every month at the correct time
    2. When you have more money in your mortgage account than you should have – the bank will see this as a lower risk
    3. When you have something on your risk profile that has changed for the better.

    Personally, for my investment properties, I like adding the following: “I treat my properties as a business, and would like to keep doing business with you (Bank X)”. 

    Conclusion

    It’s worthwhile for some people to move their home loan if they would get a better deal elsewhere. Although this can be an option, all calculations and costs must be known to make a decision that will be in your personal interest.

    Negotiating with the bank is something that can save you a lot of money.

    If you don’t ask, you don’t get – so why not ask your bank for lowering your interest rate?

    Happy investing!

    Sources consulted

    Maya on money – Should you renegotiate your mortgage rate?

    Property24 – Negotiate for a better home loan rate

    PowerFM – Cano you negotiate for a better home loan interest rate?

  • Negotiating With Your Offer To Purchase

    Negotiating With Your Offer To Purchase

    The offer to purchase

    So, you’ve done all your checks and you’re ready to sign the offer to purchase? 

    Awesome!

    But before you do, it’s worth understanding the details around what you’re signing. 

    What it is and why it’s important that you add necessary exit and protection clauses? 

    Many agents will claim that there is a standard offer to purchase (OTP). 

    This is not true.

    There is not one OTP to rule them all.

    You CAN negotiate a property deal. 

    What is the OTP?

    The OTP is a legally binding contract between you and the seller where you state the terms under which you will buy the property. It also includes the purchase price, your personal (or company details), deposit information, the infamous voetstoots clause and compliance (such as the COC certificate).

    This will be discussed more in-depth below. 

    What can I negotiate?

    As the purchaser, you might feel like you don’t have special rights to negotiate a deal. I want to encourage you: don’t settle for second best! Property is much more negotiable than you might think. Here are some areas that you can negotiate:

    • The purchase price of the property.
    • Choosing attorneys (and negotiating their fees).
    • Exit clauses that will protect you if you don’t want the deal.
    • When and how you will take occupancy. 

    Price negotiation

    Top Tip
    Never pay the deposit into the account of the agent – always pay it into the trust account of the transfer attorney directly

    Though I have a dedicated article about purchase price negotiation here, I would like to mention some things here, as it touches on the OTP as a legal contract.  

    Once you reach the OTP stage, you have probably negotiated the purchase price down already. You have also probably elaborated on what needs to be done with regards to maintenance as a condition. It is also not unheard of that the seller is tight on money, which makes negotiation a little bit more challenging. It might thus be better if maintenance is done once the property is registered – and the OTP is the perfect place to add these conditions!

    If necessary, add a clause to the OTP to withhold the money needed for maintenance to make the necessary fixes after registration.

    Make sure that the amount offered and the deposit amount is correct! 

    Attorneys

    Top Tip
    Some banks allow you to choose your own bond attorney. If you have the same bond and transfer attorney, they tend to give you a discount on the bond and transfer costs.

    When it comes to the transfer attorney, it is customary that the seller appoints their chosen minion. As this is not a legal requirement, you can negotiate to use your own.  

    One might say that the only reason for this is financial gain (as your own attorney probably will charge you less), but it’s also for the sake of convenience. Your own attorney has all your information already. It is therefore convenient not needing to gather all paperwork again.

    If you have a friend or someone that will give you a discount, this is definitely worth the negotiation.

    Exit clauses

    One of the queries I get most about OTPs is how to get out of one.

    It is with dread that some people realise that if you signed an OTP, you are bound by it. Make sure you have the necessary exit clauses in your contract. If you need to exit the deal, you need to have the option.

    Getting a loan

    One of the ways that estate agents make extra cash is through mortgage origination. In short, originators go to all the banks and get you the best interest rate. This is awesome for most people. This safeguards the deal (and their commission).

    The issue is that in many cases the agent forces you to hand over your documents. They will handle the communication and negotiation on your behalf. 

    I have seen many OTP’s where they force you to go through with the using their originators – and they know if you will qualify and for how much. It might be in your interest that they should not have knowledge of this information.  

    It’s therefore advisable to either appoint your own originator or do it yourself. You can also add a clause that you would need to approve the interest rate/loan amount to be reasonable and to your liking. 

    Concerning deposits, you might be overplaying your hand if you add it in writing in the OTP. Once you have secured a loan, you will be able to negotiate with the banks for a better interest rate (see my article here).

    Inspections

    I am sure you cannot relate, but landlords and tenants can be strange. In some cases, you might not have had full access to the property! For example, the owners weren’t home and your handyman couldn’t get access. 

    You can amend the contract that you must be allowed to end/renegotiate the contract upon inspection if the maintenance makes it unfeasible. 

    If possible, it is also worth doing a full inspection to check for structural, aesthetic and other damage – just to make sure you know what you’re buying and adjust the purchase price accordingly.

    Compliance certificates

    Not so long ago, I bought a property. I went there to pick up the keys from the caretaker, just to discover that the COC has been issued without any electricity. Needless to say, I lost it completely.

    It is, for this reason, I would recommend choosing the contractors yourself for the electrical, gas and beetle certificates.

    Add this into the OTP.

    Make sure to add that the seller must pay for the fixes that need to happen!

    Penalties

    It is worth checking that the OTP also has clauses that no penalty will be payable if you do not receive a 100% loan. 

    If, at your discretion, the interest rate is too high, you must be able to decide not to accept a deal from the bank (The bank calls this an NTU).  

    Tenants and occupancy

    Sometimes a property is sold to tenants. The question is if the tenants should stay on or not.

    In the case where the tenant has paid rent regularly without issue or default, the information around rent payable should be specified. If there are issues with the current tenant, add a clause whereas occupational rent is payable until the tenant moves out. This will cover your back!

    I want to make it clear that everything here is negotiable: I had a very interesting case not that long ago. The property was without a tenant, and the seller wanted occupational rent from us. We negotiated that we get access to the property to paint and do needed maintenance. Occupational rent will only be payable to the seller in the case when we found a suitable tenant and received the rent. 

    Sectional title properties

    If you had to buy a share in a company, it would be wise to scrutinise their books. In the same way, when purchasing a property in a sectional title block, add a clause that the financial documents are delivered to you within 7 days. 

    You should have 7 days to check go over the documents and confirm all is well.

    Once you’re happy with the documents and what they contain, you must be allowed to approve or retract your offer. This is helpful for you, the purchaser, not to buy a flat in a block with serious debt.

    The voetstoots clause

    It is often misquoted that the voetstoots clause is no longer valid. This is only the case where the seller is in the trade of property. If the seller is using the home as his primary residence and/or rental, it becomes increasingly challenging to prove it’s their trade. 

    In the scenario that you only find out something is wrong a year or two later, you would need to prove that the seller willfully withheld the information from you at the time of selling. This is exceedingly difficult, and I have heard multiple stories where people decided to just pay for the damage themselves.

    Conclusion

    An offer to purchase (OTP) is a legally binding document.

    Make sure you read and understand the details.

    Add a few exit clauses for yourself to make sure you can worm your way out of the situation if the deal is not as sweet as you might think.

    Go now!

    Happy investing!

    Sources consulted

  • Flipping property – making money from buy to sell

    Flipping property – making money from buy to sell

    Flip property in South Africa

    Buy to sell – or better known as the ‘buy to flip’ strategy is one of the few property strategies to generate capital gains in a very short time. This is in contrast with buy to let where the property will generate a recurring income.  

    As the name suggests, the concept is quite simple: you buy a property and sell it at a profit. Though easy to understand, it’s exceedingly difficult to master this strategy.  

    Why choose this strategy?

    As a short term strategy, you need to make sure that you will make a profit:

    Profit = Sale price – Purchase price – Costs

    The art in this equation is to know if the purchase price is below market value and how to keep your costs in check. 

    For calculating the profitability of a flipping deal, it is worth using the ROI calculation

    Return on investment (ROI)

    The ROI calculation is determined as follows:

    Profit / Cash invested = ROI

    As an example, If I invested R 360 000 in a property and sold it for R 420 000, I would’ve made a profit of R 60 000. The calculation would look like this:

    R 60 000 / R360,000 = 0.16

    As a percentage, this would translate to a 16 % return. In general, a 20% ROI is a good number to work with – note that this is only a guideline!

    Buy to flip options

    Buy to flip have has different permutations. From a simple flip to a more complex strategy like fix and flip or rent.

    Buy and flip

    The most simplest form of this strategy is buying and selling it immediately – no fuss, no issues and no red tape.  

    In many of the costly property courses you will find people promoting this with a simple trick: make sure the transfer and bond attorney is the same person/company – and appointed by you. You will sign the OTP and will sell it to another person for a greater price. In this scenario, the initial OTP will not be signed by you. 

    Buy, fix and flip

    In some scenarios, a property will be at a discount because the owner or tenant ruined the property. 

    Whatever the circumstances of the seller, he does not want to fix the property up but sell it immediately. It is worth pointing out to the seller/agent everything that is wrong so you will be able to get a better purchase price. 

    For fixer-upper properties, it’s recommended to get quotes to determine the exact cost (with timelines) of when the property will be ready to sell. These factors will determine the profitability of the deal and can turn a sweet deal into a nightmare from hell.

    Buy and sell rental property

    It sometimes happens that the purchaser fixes up a property specifically to sell it as an investment. 

    This makes it attractive to investors, as the property has been renovated and the tenant is already in place. 

    Doing this will also make your cashflow look great while you wait to sell the property. 

    Warning

    It becomes clear that you will need to have exceptional knowledge about the area’s property costs as well a team of property specialists to help you on this endeavour. Make sure you have a great team to back you up and confirm with you if this is going to be a good team or not. 

    Make sure that you have done all calculations concerning the cost and profitability on the deal. Rental property might be forgiving, but short term buy and sell is not!

    Tax on buy to sell properties

    The South African Revenue Service love people that invest for the long run. Investing in property is not different: if you buy to let, you will be liable for capital gains tax when you sell (more info here!). 

    In the case that you flip properties, the following options will apply:

    • If you flip properties in your own name, you will be liable to pay income tax at your normal tax bracket at the end of the financial year
    • If you flip properties in a company, you will be liable to pay company tax on all profits at the end of the financial year. This is currently 28%. If you want to get the money out of the company and into your pocket as income, you will be liable for income tax.  

    Conclusion

    Flipping properties can be exceptionally profitable if executed as a well-calculated risk.

    It’s worth investing in a good network of developers, attorneys and handymen to assist in your endeavours to make it worthwhile. 

    Don’t be too hasty to flip deals if you don’t know what you’re doing.

    Happy investing!

    Sources consulted

    Private Property – Buy property for profit 

    Prime location – How to become a property developer 

  • Make money through short term rental or holiday homes

    Make money through short term rental or holiday homes

    The holiday home renting strategy

    Renting a holiday home next to the beach is just bliss. You get to rest, get your strength back and relax. 

    It is obvious why the appeal is so great for property investors to put their money where their heart is – between the sand and waves.

    Many people cannot afford to buy a holiday home, but can afford to take a few weeks off a year for a holiday. It is for this reason that the rental business has such a big investor uptake in coastal towns and in the bush veld.

    If you’re interested in investing in a holiday home, then this article is for you! 

    What involvement is required?​

    When investing in property, most people prefer to have a hands-on approach. They like being involved in their investment – as any money they make they believe they earned, rather than just collecting dividends and not having control over your investments.

    In most cases, holiday homes are the exception to the property rule – you will often have difficulty managing your property, unless you live close to it – which everyone reading this article will be very jealous of. 

    It is often necessary to outsource the maintenance and rental of your property to an agency.

    It’s also worth noting that you would often be required to find tenants yourself, because agents, as wonderful as they are, are not nearly as effective as you would like them to be. 

    Safeguarding yourself

    Note that all running costs will be payable even if you do not have a tenant, so you need to prepare for these. 

    When it comes to investments in general, the mantra rings true:

    Prepare for the worst and hope for the best. 

    It’s for this reason that it is highly recommended to have the following in place:

    • Before you buy, make sure you’ve done all your calculations and homework. You need to be sure that this will work and you will get short term tenants.
    • Have a property emergency fund
      • An emergency fund is in case the property is vacant for a fair amount of time or you need to fix something. 
      • I suggest having 5 months of property expenses saved in your bond.
      • If you don’t know about emergency funds, check out my article here.
    • Consider having insurance on your property, including home content insurance

    The crux strategy for holiday home renting in South Africa

    As you know by now, the core strategy is buying a holiday home and renting it out short term to holidaymakers. 

    With so many places available, it is advisable to determine the why, so that we can determine the where:

    • Are you planning on moving there yourself one day?
      • Your property layout and location will be affected by your choice!
    • Are you looking for cash flow?
      • get a property in an area with a high number of visitors 
    • Are you looking for capital appreciation?
      • Find a property at a discounted rate in a good area

    Tax

    All income should be declared to SARS – this would include your rental income or other income such as renting out the garages separately.

    All expenses should also be declared to SARS. These include water and electricity, rates and taxes (rubbish removal and sewage), levies, furnished breakages and expenses.

    For holiday homes, we have a choice – we could use the buy to let strategy (as outlined here) using a bond or we could buy it cash. If we buy it cash, we would not be able to deduct bank interest from tax. The way you handle this will depend on your age and strategy

    Calculations

    With holiday homes, I advise making a concerted effort to calculate the risk before you buy. Ideally, you would want to use the 1% rental factor rule, but due to the property being furnished, it might be a good idea to work on a higher percentage.

    It would be wise to use the following in your calculations:

    • Occupancy rates
    • Rates (electricity and water), taxes (sewage, rubbish removal), 
    • Furnishing costs including the kitchen, lounge, linen and braai facilities  
    • Rental agent fees

    Conclusion

    Though the stability of your tenants is not nearly as good as having a tenant for a year on contract, the returns do support this strategy. 

    It is highly recommended to do all your calculations in detail to make sure if a property is going to be profitable. 

    Take as many variables as you can into account, including the source of your tenants.

    Happy investing!

    Sources consulted

    Here are some of the sources I consulted and for extra reading:

  • Investing in Student Accommodation And Communes

    Investing in Student Accommodation And Communes

    Billions of students on your property

    With more students joining tertiary institutions, it has become necessary to adapt accommodation to their needs around these locations.

    Many people are taking advantage of this and are converting old homes and flats into living quarters for students and young people.  

    Research by Jones Lang LaSalle states that student accommodation will soon reach 500 000 beds in South Africa. 

    Why choose this strategy?

    Student accommodation is not the right fit for everyone, as it does need quite some maintenance, effort and management from the landlord (or the rental agent). Though students often don’t need perfect homes, it also means that you would not need to deliver perfect marble tops and golden taps at the flick of a wand. 

    Here are some considerations and ideas around this strategy:

    • You will be able to buy to let the property (a buy to let strategy)
    • If you have a bond, someone else is paying it off for you
    • You will most probably be investing in a cash flow property – one that generates more cash monthly compared to the value of the property itself
    • It’s often more lucrative than normal family homes, as you charge per person on the property, and not per family. 
    • You will most probably be getting a 1 % + rental factor after deductions.
      • That would mean more than R 5 000 per month net on a R 500 000 property

    Student accommodation options

    Due to so many students requiring accommodation close to universities, different options have arisen to meet the need – some being more expensive and fit for a king and others being fit for a squirrel. 

    Purpose built accommodation

    If you have enough capital and the contacts to assist, you’re able to custom build a block of flats or similar. One can either buy an existing block or develop your own. If you’re developing your block, it is highly recommended that you:

    • Have prior experience in the building industry
    • Understand about zoning, submitting plans to council and the rules around this
    • Have adequate cash flow and money available (or an approved loan) to fund the project

    Note that for this type of accommodation you would probably need a rental agency to manage the block, as managing a lot of students could be challenging!

    Flats and apartments

    Many universities are located in the older parts of cities, such as the University of Pretoria and Tshwane University of Technology (TUT). These areas also have many flats that default to be used as student accommodation. 

    While browsing for flats, I have seen terrible flats in terrible blocks – for example, a block that is deep in debt where a 2 bedroom flat had drywalling added to make a few more bedrooms. The kitchen had a thriving cockroach colony, seemingly unphased by the usage of the room for a meth lab.  

    On the other hand, I have also seen beautiful flats that were rented out at a premium price.

    Here are some pointers when looking to buy a flat for student accommodation:

    • Buy a terrible looking flat in a well-managed block
      • The levies and  statement of cash flows will give you an idea of what is going on in the finances
      • Check out the external appearance of the block – if it’s scruffy, it’s in debt.

    If you’re planning to go for the sardine strategy:

    • Check how much available space the flat has – extra space can be rented out
    • The price of the property plays a much bigger role than the condition it’s in – the students will most probably ruin your property.  

    Whichever strategy you decide to follow, location is the most important thing – your rent will be determined by how close you are to the tertiary institution.

    House sharing

    If you’re looking for the midway between a flat and building a block of student accommodation, then house sharing is for you.

    Many people buy old houses close to tertiary institutions and tweak them to cater to students’ needs. Some communes have en suite rooms, whereas others have shared facilities. In the same way as flats, you would need to decide on your strategy and follow through.

    A few things are important to consider here:

    • You need to make sure that the security is up to scratch
    • Keep maintenance in mind – students are renowned to have no respect for your property. You will need to unclog drains, fix ovens and stoves often and do garden upkeep – or hire people to manage this for you (which costs money).

    If you’re looking to use the sardine strategy, you would look at the number of rooms (including back rooms and maid quarters). The aim would be to optimise the space.

    Warning

    I am repeating this, due to the importance: It is worth noting that students are also renowned for having no respect for your property. They will probably ruin it and paint rude symbols in blood all over the place. It has also happened that students stop paying halfway through the year. 

    It, therefore, makes sense to check on and screen well when selecting tenants. These should include a credit check, financial and affordability checks and university registration details. For finding normal (non-student) tenants, check out my post here. 

    You must calculate all income, expenses and all costs concerning your property deal. Some of the considerations should include:

    • Rates and taxes – water, electricity, property taxes, sewage and refuse removal
    • Sectional title levies (for flats)
    • Insurance – homeowners cover, life insurance if required by your bond
    • Maintenance and rent protection insurance (if this is taken up).
    • Finding tenants – advertising, screening and finders fees if using rental agents
    • Any management fees – monthly costs are normally 8-14% of monthly rental income, with finders fees of up to 1 month’s rent.

    Conclusion

    Student accommodation and communes are worth exploring as a strategy. 

    Though having its risks, it also has above-average returns compared to renting to a family.

    When choosing this strategy, be careful of who you allow renting from you.

    Happy investing!

    Sources consulted

    Rawsons – Investing in student accommodation 

    Property24 –  Student accommodation – a golden opportunnity for SA investors

    The South African – investing in student accommodation

  • How To Sell Your Property Faster

    How To Sell Your Property Faster

    It’s time to sell

    The time has come to sell your property.

    From the plethora of reasons which might include you’re upsizing, downsizing, dying or selling due to the investment going south – one needs to realise that at some time or another, a property will be sold, disowned, repossessed or traded.

    To make it easier for the normal person on the street to sell their property, I have written this blog post.

    Getting rid of chancers and investors

    Stating the obvious, we know that you want the best price for your property. It’s also common knowledge that property is as liquid as bricks and mortar.

    This is why buyers often believe they have the power to negotiate a low purchase price. 

    In many circumstances, this makes for sad sellers.

    For this reason, it’s important that you price your property according to the amount of time you’re willing for it to be on the market. If you want to get rid of it quickly, you will need to sell it cheap. If you want to get a good price, you need to be able to weather the storms and wait for a good deal from a buyer.

    The onus is on you to do your market research on how much you will be able to sell your property for realistically. Don’t trust the agent who is selling your property. Many agents are willing to sell both your kidneys at a discount to receive a commission.  

    Making your property appealing

    We need to realise that buying a home is an emotional experience. 

    People want to feel an emotional connection with a home. They use words like ‘it needs to speak to me’ and ‘I am not feeling it’. For this reason, we need to make the experience wonderful and delightful for anyone coming into the house for a viewing.

    I am not suggesting offering them 500-year-old whiskey and hiring paint strippers to make them feel ‘at home’, but that there are important changes that you can get in place to make the experience smooth and wonderful.

    Fixing the important things in your property

    When a new person engages with a new space or person, it’s interesting to note what their reactions are. 

    These include breathing, smelling and looking.

    People are acutely aware of the new space. 

    As the seller, you can fix some small things that can make a very big difference to the purchaser’s perception of the property.

    These include:

    • Door knobs – being the first thing people touch when entering a room or house, if these are broken or not working, it makes for a terrible first impression 
    • The paint job – Neutral colours such as white are timeless, yet many people try to sell their property that looks shoddy and dirty. It’s best to be human and clean the walls. Include paint for the ceilings and cornices!
    • The kitchen and bathroom – Many companies push to fix these before you move out. In my personal experience, one can make small changes here with a big impact. These include respraying old enamel baths and/or replacing broken cupboard handles (or even just the doors). 
    • The garden – If your garden looks like the Namib desert, it is advisable to start growing something in there. Make it look aesthetically pleasing. 
    • Lighting – fix light fittings and light bulbs that are broken. Make sure that the property is well lit for potential buyers.

    When you’re ready to sell

    Careful!
    Be wary of sole mandates. This is often a back door for you to get into a legal issue if you find a seller yourself.

    Once you have fixed up a few small things on your property, it’s important to do your market research about commissions, fees and due process.

    Some estate agents charge a large fee of up to 10% of your property value. For larger properties, some companies do charge a flat rate. The first one that comes to mind is LeadHome.

    Make sure that they are accredited and ask them contractually what they will do to market your home. Ask about their marketing strategies and their success in the area. You need to know from them how many houses they’ve sold in the area that are similar to your house and how much the sellers received in their pockets.

    Make sure the contract you sign with them is read and understood. 

    Don’t just sign anything.

    Viewings and selling

    There is currently a trend of properties being sold online through websites. 

    Though this is awesome, people will often still come and view the property before making the final decision.

    Make this experience as wonderful as possible.

    The property show experience

    Your estate agent will most probably have show days for your property. If this is the case, you would be required to disappear for the afternoon while they show it. Consider the following:

    • Don’t have any unusual odours and smells in the house
    • Make sure everything is well lit
    • Hide all valuables that you would not like to lose such as iPads and laptops.

    Negotiations

    Once you have an interested buyer, you will be contacted by the agent with the offer. 

    Some agents require an offer to purchase (OTP) before presenting the offer to the seller. Some call the seller first to confirm and then make it official with an OTP.

    Never sign anything if you’re not happy with the terms and conditions and the price. 

    You as the seller have the right to say no to any deal presented.

    Note that you can negotiate on other terms, not just the selling price. I have heard of negotiations on the COC, transferring attorneys, cash price sale, and maintenance that needs to be done on a property. 

    All of these things will help you get the best price for your property. 

    As much as you want a good deal, the purchasers will do anything in their power to get the best deal for themselves.

    The voetstoots clause

    In South African law, there is something called a voetstoots clause. In Latin one could use the phrase ‘caveat vendor’. This refers to the idea that a property is sold as-is – with all its defects.

    Many think that the National Credit Act has replaced this clause, but this is not true. It’s only for people who actively trade in property, such as a property developer.

    For the voetstoots clause to be declared inapplicable, the onus is on the purchaser to prove that the defect(s) were wilfully withheld from the purchaser.

    I recently had a case like this, where the seller willfully chose to get an illegal COC without fixing the property issues. I discovered this before I signed the final paperwork, and negotiated a special clause in the contract to get the issues fixed.

    This section is added that the seller is aware that they should not willfully withhold any knowledge of defects on the property. For more info, check this article on private property.

    Costs when selling a property

    Never think that there will be no cost involved in selling a property.

    There will be costs for a COC (Certificate of Compliance), bond closing attorney costs and other fees payable.

    For more information, check my article here.

    The last warning

    Always read your contract.

    I have heard horror stories where the estate agent, electrician and/or attorneys cheated sellers and buyers – and I have had a few of those personally as well.

    For example, someone close to me was asked to sign a sole mandate contract which stated that upon selling the property, the commission will be paid to him – and this will be done even if the property is sold by someone other than the sole mandate agency. 

    We know of recent cases where the sole mandate contract could not be cancelled 3 days early, and the estate agent took legal action against the seller for breach of contract.

    Be careful out there!

    Conclusion

    If you want a good price on your property, you need to have time on your hands. It also needs to be well maintained and aesthetically pleasing. If you want to get rid of your property quickly, a lower selling price will make the property leave your ownership.

    Make your property attractive to buyers and negotiate with them for a fair price.

    The onus is on you to know what your property is worth.

    Never lie about property defects.

    Happy investing!

  • How To Use Property Tax Incentives In South Africa

    How To Use Property Tax Incentives In South Africa

    Tax and Property

    Profit within the property sphere is normally taxed at your full income tax rate. 

    Though this might make you exceptionally happy (or not), the government tries to stimulate the economy by giving tax incentives to individuals and businesses who invest in the property sphere. 

    These often come in the form of tax breaks and tax discounts. 

    Nothing is ever free

    Nope. 

    Never.

    The South African government’s debt is spiralling out of control, and the revenue services are sandwiched between stimulating the economy and getting money to pay the national debt. 

    Many of the tax incentives have clawbacks if you sell your property within a defined timespan. With others, you will lock your money into the scheme for a certain amount of time.

    I do therefore suggest that you do your research thoroughly on these tax incentives and get the correct structures in place, including when it would be worthwhile to buy the property in a trust or company. 

    Did I mention you should do your own research as well?

    Section 13 SEX

    This is an Alert
    Make sure you understand all clawbacks and exiting clauses before claiming this tax break.

    Section 13 SEX in the tax law is an incentive to encourage people to build new (mostly residential) properties and use them for ‘business’. This is for new or unused residential rental properties. 

     If you are building a new property as a developer, it’s called a new property. If you buy the property straight from the developer, it becomes an unused property. 

    You need to have 5 new or unused properties.

    As the tax incentive, you can deduct 5 % – 10 % of the property value every year, depending on some parameters. 

    Note that there are clawback clauses. This means that if you sell the property within the 20 years, you will need to pay back every cent of tax breaks back to SARS

    Resources:

    Section 12 J

    It has been decided to discontinue this soon
    Note that Section 12 J investments are currently in the process of being phased out.

    SARS realises that we need small and medium-sized businesses. They have here incentivised us, the humans, to invest in companies that can help grow the economy.

    Section 12 J in the tax law covers how individual investors can invest in venture capitalist companies. I have personally come across examples of property companies which uses this act to raise capital to build property. 

    Investors in this section of the tax law are normally for people with R 1mil + to invest. 

    Your money will also be locked in for a few years, as per legal requirement. This is normally 5 years or more. 

    Performance fees, management fees and other evil fees which are not always explicitly stated are often charged by these companies.

    With all this red tape, what is in it for me? Well, you will get a tax break – i.e. you get the income tax money back on the amount that you invest. This is done very similarly to how an RA works. You will also have the opportunity for capital growth.

    Section 13 QUAT

    Some inner cities look terribly dilapidated and old. SARS created urban development zones (UDZ) which allow for tax breaks when you invest in these areas. 

    For qualification, it’s quite complicated. Here are some of the requirements

    • It needs to be either a new or renovated building  of a minimum of 1000 square meters
    • The building needs to be in one of the defined zones.
    • You cannot claim both Section 13 SEX and Section 13 QUAT. It’s an either-or situation.
    • Make sure that the developer has not already claimed this back on any part of the building, otherwise you’re in big trouble!
    • You need to use this as a rental property / properties. You cannot claim this benefit as your primary residence.

    Note that only some fees can be tax-deductible (see here). These include construction, drainage and security. 

    If you buy this as an unused property directly from the developer, you can deduct up to 55 % of the unused property. If it’s a fixer-upper (t’s and c’s apply), it’s up to 30 %. Please check the SARS link below for the exact breakdown of how much is claimed every year.

    For SARS and tax returns,  You would require a certificate from the municipality to prove that this is in a UDZ. 

    Section 13 QUIN

    Though I personally don’t invest in commercial property, the law allows for tax breaks on these as well. For all purposes of this article, it’s the commercial brother of Section 13 QUAT. 

    FLISP government subsidy

    Though this is not a tax break, it’s worth a mention here.

    FLISP is for people with the following:

    • R3 501 and R22 000 per month
    • You are a South African citizen or have permanent residency in South Africa.
    • You have not received a government housing subsidy before.
    • You have not owned fixed residential property before.
    • You are competent to contract – over 18 years.
    • You are married or cohabiting.
    • You are single with financial dependents.

    The subsidy can be used to make your bond amount less, and thus lowering your repayments every month. 

    Tax neutrality: rental properties with a bond

    Though not on the SARS list, I want to mention the strategy of staying tax neutral. You’re able to deduct the costs involved with running a rental property which includes the interest paid to the bank, levies and rates & taxes.

    This means that though you would need to declare all income and expenses, you’re not paying any tax on gaining the property – only on profit.

    If you’re interested in this, check out my article on rental property strategy here!

    Conclusion

    There is no such thing as a free lunch. 

    Sorry… 🙁

    Yet SARS gives people incentives to buy and hold property. 

    If this falls into your strategy, then you will be able to research and find some great deals to discover.

    Go now!

    Happy investing 

  • Why Passive Income Is Better Than Active Income

    Why Passive Income Is Better Than Active Income

    People want money

    I recently spoke to someone on Twitter who confronted his financial advisor about the exceptionally high commission on their entire fund value. The FA eventually just shrugged and said: “Well, we all need to live!”.

    This is true – we all need to live.

    And we need money for living. 

    People want to get paid. Whether it’s through active or passive means, they will go to great lengths to get more cash.

    In this article, I want to explore where this money comes from – how people get paid.

    Active and passive income

    I am sure you’re fully aware of the difference here, but I do feel it important to explain.

    Active income is something you need to do to make money from it. You need to sell your time, expertise or manage people to get a salary or money into your bank account. Examples of these include your full-time job, sales commission and reselling of products (with you needing to be there to do it).

    Passive income is the best – you do nothing, and the money keeps rolling in. 

    This is where your money works for you to make more money babies – it frees up your time to do what you want to do. 

    Examples of this include investing in the stock market, investment properties that are managed by an agent and capital gain from selling an investment.

    Active Income streams

    Our job

    For most of us, we need a job. 

    We actively exchange our time for money – and this is okay.

    Our job will offer us money, sick leave, annual leave and the security of not being able to fire us tomorrow for no apparent reason. 

    Contractor

    If you’re a contractor, you would either sell hours or negotiate a monthly paycheck. 

    A contractor is normally employed for a certain period, or on a (monthly) retainer.

    Due to the risk of losing your job overnight, often not having any sick leave nor holiday included in their package –  contractors get paid premium rates.

    Self Employed / Business

    As a self-employed person, you also get no sick leave or holiday. If you take leave, you don’t get paid. 

    The awesome thing is that it often frees up your time. Some self-employed people work day and night – but reap the benefits financially. 

    Commission

    Many people get a commission on sales, introducing two people to a business transaction and so forth.

    Though almost passive by times, the individual needs to actively connect the people and make the sale through phone calls, etc. 

    The commissions are normally sizeable. An example is a real estate agent gets paid when a person they introduced to a property and actually buys it.

    Passive Income streams

    Let’s get into the fun part. 

    Capital Gain

    If you would buy something and sell it for a bigger profit a few years later – you would be able to make a nifty profit! 

    Examples of this include property, gold and stocks. People hold these for a few years, and when the time is right, will sell it for a profit. Remember you will need to pay taxes on your profits!

    Dividends

    When you buy stocks in a company and the company is making a good profit, they may decide to pay out a dividend. This is a little thank you (or profit-sharing ) to the shareholders. 

    These can range from nothing to quite a bit of money. 

    If a dividend gets paid, it would generally be around 6-12 % of the stock price. 

    Interest

    This is an easy one – you save money in a savings account at the bank, such as a 32-day notice account. The bank will pay you interest on the money you invested. 

    Ka-ching!

    Royalties and licencing

    Though not for normal people like you and I, many companies and people make money through licensing patents, technologies and photographs. Here are some examples:

    • Photography – when someone uses your photograph, they need to pay royalties. There was a case in 2018 where a monkey grabbed a camera and took a selfie. PETA (People for the Ethical Treatment of Animals) took court action that the monkey owned the rights and royalties! 
    • Software is often white labelled (the logos took out) and resold to different corporate clients
    • Big companies such as Apple and Samsung make (and pay) exorbitant royalty fees!

    Advertising

    Though the dodgiest form of irritation this side of the dark web, many websites have a fair amount of ads where they get paid when people click on the ads. 

    Other opportunities include partner programmes where you advertise a third-party product on your site and get paid if they buy it (e.g. Amazon products).

    Rental income (with a managing agent)

    Though some people decide to manage rental property investments themselves, true passive income is achieved when the owner is not involved at all. 

    The rent is paid to the owner, for which nothing is done at all – someone else is managing the property for the owner. 

    Other non-money ways of getting paid

    Time

    I know that time cannot be quantified in monetary terms, though I believe that it’s the one resource we can never get back. 

    We need to value it when we get paid in time off, freed up time to spend with those we love and to do what we value.

    Conclusion

    Remember – our world loves exchanging time for money.

    Time is something you can never get back.

    If at all possible, try generating passive income rather than sacrificing your time for money.

    Happy investing.

  • Top Property Negotiation Tips You Need To Know Before You Buy

    Top Property Negotiation Tips You Need To Know Before You Buy

    Negotiate your property deal for the win

    So you’ve found the property that you’re looking for. You know if it’s a good deal or not, but you sort of have a couple of loose ends that you need to tie up.

    When you buy something as expensive as a property, you need to negotiate to get the best deal for yourself.

    It’s vital that you know on what grounds you are able to negotiate with the seller.

    Calculations

    As you will know throughout my website, I love calculations and working out what the best deal will be – where my break-even point will be, what I need to pay for a property for it to be a good deal, and what constitutes this to be a good deal. 

    It gives me an idea about what I should offer to make it worth it for me.

    Use your excel spreadsheet and your calculators often!

    Repayment calculations

    I personally use repayment calculators to check how much my bond would cost me every month, and from this check what my shortfall will be. The quick calculation around this is, for example:

    Income: R 5 000
    Expenses: R 1 000 + R 400 (Levies + rates & taxes)
    Total left before bond repayment: R 3 600

    Total bank repayment: R 3 500
    Total Profit/loss: + R 100 (Profit)

    Rental factor calculations

    Another calculation I am very fond of is the rental factor: If I buy a property for R 300 000, then a R 3 000 per month would give me a 1 % rental factor. 

    Ideally I would like 1 % after all expenses have been deducted.

    Considerations for negotiations

    Maintenance and fixing things

    Many people don’t care about their properties. They rape it and then try and sell it to make it someone else’s problem. 

    Though this sounds terrible, it leaves so much room for negotiating the price. 

    It is, of course, your job, as the buyer to calculate how long will it take and how much maintenance would be needed for this property to be tenant-ready.

    What is the state of the area?

    Why not go for a drive through the area? 

    Here are a few pointers:

    • Are there a lot of properties on the market? Why? You can negotiate for a lower price if you see a lot of “for sale” signs.
    • Check with a few estate agents in the area to get a feel for what a similar property will be going for. Is the purchase price in line and market-related? Is the property overpriced by those standards? Why is it underpriced? 
    • Most estate agents have a list of recently sold properties of the area. This will also be able to give you an indication.

    Negotiation by assertiveness

    If you have a pre-qualification certificate, then you will be able to say: “look, I know that from all my knowledge, the bank will be able to lend me that money”. 

    Some people are lucky enough to buy a property cash. If this is you, then this is an exceptionally good card to play – there will be no need to wait for a bond to be granted, and you will conveniently settling the transaction much faster than other people looking for a bond.

    This gives you a lot of power over them to negotiate a better purchase price.

    Many people don’t like this, but I have in the past told the estate agent to make a ridiculously low offer. I did this because I not only knew the property was worth more, but wanted to make sure my shortfall will be zero. It was quite a scene when I forced the estate agent (who told me that a higher offer has been rejected), to speak to the seller and make the offer. 

    The seller acquiesced, and I bought the property

    Establish yourself as a serious buyer who knows the worth of the place you intend on buying.

    Distressed property negotiations

    Sometimes you get people making distressed sales. This can range from people getting divorced from someone emigrating. 

    When this happens, they want to get rid of the property asap. 

    You can negotiate, or even pick up the property at a really good price.

    How long has the property been on the market?

    A seller will often start by putting the property on the market for a very large amount of money. And as the waiting game gets longer and it’s not getting sold, the price quite often drops by 10-20 %. 

    If the price is still too high – remember, you can make a lower offer!

    You have the power as the buyer. 

    Conclusion

    We, as South Africans don’t like negotiations.

    It’s so meh – can we not just pay the asking price?

    In the property sphere, it’s exceptionally important to negotiate – or you will get a bad deal. 

    So now that you know how to negotiate better when you want to buy a property – go and do it. 

    Happy investing.

  • Where do you start when viewing a property?

    Where do you start when viewing a property?

    Stop me if you’ve heard this one. 

    My real estate agent comes to me and tells me about this beautiful property. They claim it’s an absolute bargain at R 100 000 for the whole block of flats. They furthermore claim you can sell it for one hundred million dollars. And due to the property being a distressed sale, they are confident the seller will be willing to negotiate the price. 

    You arrive at the property to find out someone is selling a two square meter home. Well, it does have 28 bedrooms for all the chickens living in it. Yet, they are promising great returns – though it’s situated in Twee-buffels-met-een-skoot-doodgeskiet-fontein, located close to Putsonderwater.

    I suggest that you tell the agent that’s taking you to view the property not to waste your time. Tell him your time is precious. Which it is. And if he shows you rubbish, then you will not use him and you will find someone else. 

    I encourage you to do that. 

    You need to make sure that you don’t waste their time and they don’t waste your time. When you go look at the property, you need to check how much maintenance needs to get done.

    Before you go out to view the property

    So, before you go out to your property, let’s first see if it’s worth your time and effort. You need to ask quite a few questions before you go out to view. For example, you need to ask:

    • Does it adhere to the list that you have put in place of the property that you are looking for?
      • For example, if you said you and this was a two-bedroom sectional type of unit, no pool in the complex, pet friendly and only a half bathroom. You need to make sure that it adheres to that. Otherwise, you’re wasting your time.
    • Is the property your price range?
    • Ask if the owner will be willing to negotiate the price.
    • As the estate agent what he thinks about the condition of the property – is there maintenance to be done?
    • Check for signs of moisture in the ceiling and walls

    When you are viewing the property

    When you are viewing the property, you need to look for all defects. You need to make sure you know what you are buying. 

    You need to check for issues throughout the whole house. These should include:

    • Check the paint job
    • Is the garden looking more like my anxiety levels?
      • When you are buying a sectional title unit, the gardens, neatness of the block and paint job will give away the financial health of the body corporate. 
    • Would I need to redo the kitchen?
    • Is the bathroom growing a rare species of bacteria?
    • Is the roof looking like a hail storm just smashed it?
    • Is there enough parking for myself and/or a guest?
    • Always check the noise levels. This can be a huge problem in some areas.

    You need to check specifics that will be expensive to fix. Historically, the roof, kitchen and bathrooms have been expensive. 

    You also need to check the place as a whole. If the place looks revolting, you should negotiate the price downwards.

    Make sure that when you buy, you know what you are getting yourself into!

    Negotiation power

    Remember, you’re a shopper. You’re not a buyer. You are looking for something that is going to adhere to your list. 

    You need to negotiate your way to the best deal. The above list should give you a guideline of what to negotiate on. 

    As a rule of thumb, I like taking someone with me that knows how much these things will cost. This gives me peace of mind when I make the offer. 

    If you’re looking for more tips on negotiation, check my article here.

    Conclusion

    When viewing a property, make sure you look for all defects.

    You are not a buyer, but a shopper. And you get to choose what you want.

    You have the power to make decisions and negotiate. 

    Be relentless in scrutinizing your property

    Now that you know what to look for when you are hunting for property, you can now go and find a good deal. 

    So go now. 

    And happy investing.

  • How to find the right home

    How to find the right home

    You don’t just want to buy any property

    How do you find that property that’s just right for you? 

    Well, the first question, naturally is – did you google it?

    There are many websites like private property and property24 that can help you find properties. 

    What it doesn’t help with is knowing where to start.

    What are you looking for?

    When starting, you need to get a list together of things on which you will not be willing to compromise. For example, if you have 0.5 children, you might need a 1.5 bedroom flat. 

    If you are buying for investment purposes, you might want to have a narrative like this: “I am looking for a 1.5 bedroom house, as I want to avoid sub-letting. I want a family with one child to rent from me who works during the day and comes home to sleep only. They should not need a pool, as the child is only 2 years old”. 

    Having a list is vital in narrowing down your search.

    Frugal tips on how to narrow down your list

    Here are some thoughts on what to consider when getting a list together: 

    • Will you be willing to fix up the property? 
    • Is the property in the area that you are looking for? Location is everything.
    • Do you want a sectional title or a freehold property?
    • How many bedrooms do you want? Why?
    • Do you need a garden or a pool? Why?
    • Should pets be allowed?
    • Do I want the property to be close to public or private schools?
    • Why would anyone want to live there?

    What to do with your list

    Once you have this list together, you have a few options.

    You can send it off to a couple of real estate agents who will be able to give you feedback. They will be able to give you a better idea about how realistic your expectations are and if those properties will be found in that area.

    You could also check out property websites online and filter with your list to make sure you only see things that interest you.

    Remember, you might need to make small tweaks on your list at times, as things do change. 

    Be clear that they should not waste your time.

    You need your property to meet your requirements –  as on the list  – within your price range. 

    What if you want to offer lower than the asking price?

    In my opinion, it’s ALWAYS REQUIRED to make an offer lower than the asking price.

    In the South African context, cars and property should always be negotiated. 

    Conclusion

    If you know what you’re looking for and know what price range you are much closer to getting the property that you deserve and that you want. 

    Never buy a property at a market-related price. That is a bad deal. You need to go and find a property that is under market-related value. 

    Remember you make a profit when you buy not when you sell. 

    Being an expert in property, you can go and buy a bargain.

    Go now and happy investing.

  • Do I need to be pre-approved for a home loan?

    Do I need to be pre-approved for a home loan?

    Pre-qualification and pre-approval

    When you want to buy a property, an agent will tell you: “we want to know how much you pre-qualify for because we want to make sure that we’re not wasting our time!”. 

    Though the terminology is something to be changed, the concept is quite simple.

    Once you have checked out the affordability and repayments calculator, and know what you can afford. 

    You are now serious about looking for a property. 

    As someone who is serious, you can take the next step and get a pre-qualification certificate that states how much you can afford.

    What is pre-qualification?

    Having an idea of how much you can afford and how much you can pay back is not nearly enough proof that you actually can afford a loan. 

    This is why many mortgage originators (and estate agents) have developed a certificate so that you have something to show people that you are serious about buying. As a rough guideline, it means that according to their knowledge, you have the means to afford a certain amount of money. 

    It does not mean that the bank will lend you this money, but it does give you a much better idea of your personal financial situation. You need to see it as the most accurate guideline we have before submitting our loan application to the bank on how much the bank will most probably lend you.

    What is the difference between pre-qualification and affordability?

    Most of the affordability calculators do not take into account the 30 % rule or exposure to property. It also does not include a credit check, as this will cost money.
    This is why a pre-qualification certificate was designed.
    Once you’ve done all the checks on affordability and repayment calculators, you can now go and get a pre-qualification certificate. This is normally done free of charge to you, the buyer. The check will include a credit check, and all credit expenses will be included in the calculations
    An affordability certificate is a fairly new thing. It’s basically the same as a pre-qualification certificate.
    For more on affordability and credit expenses, check out my article here. 

    Conclusion

    Though not a requirement when buying a property, it is convenient to use it as leverage to prove that you’re serious. If the agent knows that you can afford only e.g. a R 1 000 000 000 000 bond, he will show you properties in this price range.

    This will save you time and give you leverage. 

    Now that you know about pre-qualification certificates, go now!

    Happy investing.