South Africans should get over their obsession with property, says Gregg Sneddon, a certified financial planner at The Financial Coach in Cape Town.
In a recent blog, Sneddon cites an example of a client who was looking for advice on what to do with his rental property, a small one-bedroom apartment in Stellenbosch.
This equates to a yield of 3.6% - before any tax has been paid on the rental income.
“Clearly, it’s not a great investment from a yield point of view,” says Sneddon
After capital gains tax and estate agent commission, he would have R1.47 million left.
If he invested the proceeds, he could realistically draw a tax-free income of 5% for at least 30 years – the rest of his life, as he is 78.
On top of that he wouldn’t have to deal with tenants and won’t be considered a provisional tax payer by SARS any longer.
“I can hear all the rental fans claiming that 'it’s not about the rental, it’s about the growth, stupid!'” says Sneddon.
He compared the compounded return of the property value over the 17-year period (before capital gains tax) – 10% per year - which is lower than the JSE’s all share index, which returned 14% in that time. A good equity unit trust would have yielded an even higher return.
“Perhaps the thing that makes the least sense to me is why anyone would buy this property at this stage?”
He calculates that buying the property with a 100% bond will cost at least R15,300 per month at 10% interest. On top of that, the buyer will still have to pay the levy and rates (R1,300 per month).
“So your total monthly cost would be just under R17,000! And you could rent it out for R6,000 per mont! This is insanity!”
Sneddon says South Africans should “get over our obsession with owning property”.
South Africa has a relatively high rate of property ownership, with more than 60% of South African households owning their homes – higher than countries like the Netherlands (55%), France (55%) and Germany (41%). More than half (52.62%) of South African households have fully paid for their homes.
But Sneddon says in many instances it makes sense to rather rent.
“Let someone else worry about the bond, maintenance and tax and rather invest the money you would save into some real long-term wealth creating assets.
Erwin Rode, CEO of property research and consultation firm Rode & Associates, largely echoes Sneddon's views.
He doesn't think property prices will shoot higher for the foreseeable future, and that it could make more financial sense for prospective property owners to save up before buying a house with a large bond.
“Given the outlook for the economy and the still-high prices of houses in the cities, the chances of significant capital growth over the next few years are slim.
“In fact, it is, purely from a financial point of view, cheaper to rent than to buy through a large mortgage bond (loan to value) of, say 90%. It is better to rent – provided you have the self-discipline – to rent for, say, five years and save every month the amount you save on what your mortgage instalment would have been. So, think twice before buying.”
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