INVESTMENT INSIGHTS

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Investment insightsThree property investment styles Lance Levitas How to get the best returns.

Real estate is right up there as a favourite South African dinner table conversation. Following perhaps sport, crime and politics, our everyday people can spend hours discussing how they intend cashing in on World Cup home rentals or "who got what" when they sold their home.



In real estate investment circles, dinner table banter often focuses on which are the best investment opportunities. Fundamentally, the reason debate arises is because investors have different reasons for choosing property. One investor may speculate for quick profit, another may invest for longer term capital appreciation and yet another for income returns. If one puts these three investors with different investment philosophies around the table, things are bound to get very heated indeed!



Speculator Sophie says: "I can make a lot of money by buying and selling properties. I buy neglected properties in good areas, renovate them and sell them at a profit. I also purchase units off plan and sell them on before taking transfer."



Sophie may be able to make quick profits in boom times but it is doubtful whether good returns are possible in a slower market such as the one in which we find ourselves. The taxman would regard Sophie as a trader and she would be taxed heavily on the capital gains she makes. This method also begs the question: where will Sophie invest her profits?



When buying off plan there always remains the possibility that the project will never be completed or, if it is, will not resemble the artist`s design or developer`s flashy brochure. Renovating involves hard work and lots of time in dealing with contractors and project management.  Her business could be very lucrative but the intense human involvement goes very much against the passive wealth-creating qualities synonymous with real estate and one doubts whether Sophie may be even be regarded as an investor at all.



Sam, the refinance man, says: "I prefer to hold on to my properties. I never sell but instead take advantage of the capital appreciation by refinancing the properties when the rentals break even with my bond repayments. I am like the dairy farmer who continues to sell the milk but keeps the cow."



Sam focuses heavily on capital appreciation as a criterion for investment. He refinances when his investments have grown in value and his rentals just start covering his bond repayments. By refinancing at this time, he again makes a rental loss (repayments exceed income) and this situation means he legally avoids paying tax on rental income. Also by not selling the property he is not liable for capital gains tax. One must remember though that there are costs involved in continually refinancing such as valuations and further bond registrations. Furthermore the question again remains: where should Sam invest the funds obtained in refinancing?



Traditional Ted says "I focus on rental income rather than capital appreciation when selecting my investment properties. After 20 years, I will have paid off all my bonds and can retire comfortably from the rental income I receive."



Ted`s focus is on building a cash flow positive property portfolio right from the start. Good rental returns are a prerequisite, more highly prioritized than capital appreciation. Ted`s methods mean he will be debt free at retirement age and can live off the rental income. By not selling he avoids capital gains taxes. He will however be responsible for tax on his cash flow positive properties. He will not directly benefit from the increased value of his properties as he is not selling or choosing to refinance. This method however offers Sam a comfortable retirement and perhaps this is what property is still all about.



The vote results

Speculator Sophie 5%

Sam the refinance man 32%

Traditional Ted 64%

 

These names are fictitious and bear no resemblance to anyone living.

SA Property Trader  12 April 2010