Three property investment styles

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.

Vote in the property poll and share your views below this article.

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

Realestateweb's new writer Lance Levitas is an experienced property investor. He graduated with a degree in finance and marketing and worked in a corporate environment. He soon realised property was his passion and returned to study real estate portfolio management. He now lectures Business Management, Maths and Financial Management to University students. He lives in Johannesburg. Like what Lance writes? Want him to tackle a specific issue? Tell us at news@realestateweb.co.za.

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responses to this article

Question for Lance What about doing a little bit of everything? Speculation, refinancing and buying for rental? by Moneygirl on February 04 2010, 10:46 Find this comment inappropriate? Report it

Property Investment Good article simply put and clear. For speculator Sophie there are still good buys but selling could take time and if using loans profits can avaporate rather quickly. Depending on usage of refinancing funds Refinancing Sam could be in . .more trouble with cashflow. Traditional Ted could probably do better with carefull refinancing and further purchases. At the end of the day if you buy at the right price property is still an good investment . .less by ea on February 04 2010, 12:01 Find this comment inappropriate? Report it

Money girl, you are a multi tasker. Real estate is for men and puts hairs on your chest. by Chauvenist on February 04 2010, 12:43 Find this comment inappropriate? Report it

I agree with moneygirl If you can do all 3 its very profitable otherwise focus on BTL if starting out. OR just rent and keep paying off my bonds.. We cant all be landlords you know... who would rent our units then ?? by Brennan on February 04 2010, 15:24 Find this comment inappropriate? Report it

Bubble Trouble! "Real estate is right up there as a favourite South African dinner table conversation." Yes, it is, and thta's why it's a bubble, and that's why it will bust! Yet, a lot of people say we are different to the US - what are they . .more thinking? . .less by Icko on February 04 2010, 15:29 Find this comment inappropriate? Report it

A little bit of everything In my view you makre money when you buy, if you get a good deal. Then you can rent, renovate or sell straight away and you should do well under any of these scenarios. Of course, Ted's method is the long term goal but your buying power can dissipate . .more quickly. Sam's way of relying on cap gains a bit dodge. . .less by Dre on February 04 2010, 15:42 Find this comment inappropriate? Report it

Sam needs to wakeup Because when he sells the gain will be taxed as revenue / income. by RogertheLodger UK on February 04 2010, 16:30 Find this comment inappropriate? Report it

two options Traditional Ted is really just an older Sam, so there are really only two characters here? by pDp on February 04 2010, 16:37 Find this comment inappropriate? Report it

property Party is over: sell, sell sell. by Baksteen on February 04 2010, 16:51 Find this comment inappropriate? Report it

@ Brennan You keep paying that interest on the bond for me, thanks! I'm taking all the money I'm saving on bond repayments and investing it in liquid, high yielding equities I can sell at the drop of a hat should I decide to take my money somewhere else. I've got . .more lower transaction fees, lower taxes (transfer duties in your world), no maintenance fees, no taxes on ownership and no dealings with tenants or estate agents. . .less by Johnny V on February 04 2010, 16:57 Find this comment inappropriate? Report it

@ Johhny.. no buddy are paying the interest and the capital by the way We buy high yielding property investments not the junk. You may be looking at the junk wondering how we do it based on the prices you see. Problem is you have not paid your school fees. Equities, so you think they are great do . .more you.. I am sure in Sept/Oct 08 you did not feel so bullish when the market crashed. Now you think it has recovered do you? I have news for you the worst is still coming.. So you take you cash out the JSE, then what put it in the banks and get 7% pa.... haha... really... no thanks ! . .less by brennan on February 04 2010, 18:07 Find this comment inappropriate? Report it

isnt it amazing how 'CJ says' and his dingbat followers that all share the same single brain cell ha... What, you working your A** off to pay the rent? by Amazing! on February 04 2010, 19:15 Find this comment inappropriate? Report it

Talking of dinner table banter, where is the old codger CJ says? Has he finally been tossed out on his ear by his Landlord after losing all his after rent money on market speculation, tossed out by his missus after one too many rants at a dinner parry, or has he just finally just crossed over to the "other side, i.e . .more bought a house, and is too damned embarrassed to admit it. Or has CJ says just reinvented himself as Johnny V? Come on CJ says, where is you bru? . .less by CJ het gese, ek se on February 04 2010, 19:49 Find this comment inappropriate? Report it

I think CJ has got a new job and does not have time to chat New boss is demanding and they block the bandwidth so the employees dont B***** around during working hours on the internet. by the recruiter on February 04 2010, 20:54 Find this comment inappropriate? Report it

Members Im afraid only sam and ted qualify for membership of the landlords trade union (motto- all the market will bear) C.J. Says is of course a rabid supporter of the union while being denied membership. by andrewa on February 04 2010, 21:26 Find this comment inappropriate? Report it

Refinancing is all but dead...thanks to the banks The odds of refinancing your property and buying more property is a thing of the past.Banks do not grant second and third bonds anymore and if they do, you better have the salary to apply. Rents recieved is not seen a regular income by the banks and . .more therefore can be used in determining your ability to pay the loan. . .less by WTF on February 05 2010, 05:46 Find this comment inappropriate? Report it

There's another investment style: Stay the heck away from property until we hit the real bottom. by Richard on February 05 2010, 08:34 Find this comment inappropriate? Report it

You guys still rabbiting on about property investments I thought you had all seen the writing on the wall by now - let's see, the US is in serious poo and all indications are that property still has much pain to work through. Australia Property is on the verge of imploding after vain attempts by their . .more government to hold back the bubble burst. UK still in denial that prices have to fall further. And in SA the banks are not letting repossessions go for market value, preferring to hang on to them so as to prevent the collapse in prices that is needed. So instead of a quick clean crash we will have a long slow drawn out one with everyone dragging their heals, trying to deny the reality of Real prices being way way too high. Let's face it, Brennan is not OUR landlord - he is buying inner city low cost housing and renting it out to uneducated low income earners who don't have the savvy to realise they are being exploited. Most of us here are renting traditional family homes for rents of 6000 to 12000 - in our cases the bond to buy our homes would be 2 to 3 times the rent we pay. In our market, renting is far cheaper. . .less by CJ Says on February 05 2010, 10:29 Find this comment inappropriate? Report it

OK you property experts Help me out here - can you buy a 2 bedroom house anywhere in Cape Town for around R80,000 ? Just curious because I am trying to help my workers out. Any ideas? by CJ Says on February 05 2010, 10:33 Find this comment inappropriate? Report it

Houses Cape Town R 80,000 There could possible cheap land available under RDP schemes. Have the workers contact the Town Council or local Dept of Housing. Never mind houses for around R80,000. Obtaining land at R 80,000 is impossible. And yes we do . .more need a collapse in prices that are still artificially to high eg bank repos. Over time escalating holding costs will take care of that. . .less by ea on February 05 2010, 11:12 Find this comment inappropriate? Report it

"help your workers" CJ.. fire your workers, use the R80 k to buy a machine that can do their job.... by Super Duper on February 05 2010, 11:21 Find this comment inappropriate? Report it

2-beds Try Joe Slovo, Montagu Gardens and Du Noon, Table View. Generally not advertised. You'll have to ask around in the community who is selling. by Editor on February 05 2010, 11:45 Find this comment inappropriate? Report it

Who is fooling who CJ? Hey, sober up CJ and take good look outa the window....You ARE a inner city tenant bru...cos your'e IN the inner city. by CJs Landlord on February 05 2010, 11:55 Find this comment inappropriate? Report it

@CJ Is the R80 000 house really for your workers or for yourself ? Hang in there buddy, according to your doom and gloom theories you should soon be able to buy something for that price in Camps Bay ? by Frikkie on February 05 2010, 11:58 Find this comment inappropriate? Report it

@CJ says "Most of us here are renting traditional family homes for rents of 6000 to 12000" No CJ - most of us here own our houses where the bond today is less than the rental equivalent. Dito with the houses we rent out to tennants like yourself for . .more 6000 to 12000. Only the Johnny come lately's to the market fit your bill. . .less by Sam the man on February 05 2010, 13:07 Find this comment inappropriate? Report it

Thought provoking views. This article presents extremely interesting thought provoking views which lead a person to consider different aspects and possible outcomes. People invest for a variety of reasons. by Malcolm Davidson on February 05 2010, 13:22 Find this comment inappropriate? Report it

By the Way... Again another article with many tehcnical inaccuracies. Section 11 of the Income Tax act states that to deduct an expense that expense should have been incurred in the process of earning income. Thus, if you refinance the property, (example 2) . .more you can only deduct that interest if you apply it to earn taxable income (i.e. buy another renatal property), not that speed boat or German vehicle. If you do that, the additional interest will not be tax dedcutable. Per your analogy, if you drink the milk, you cannot deduct the interest on the refinanced portion. You will need to keep selling the milk for taxable income to continue dedcuting the interest. . .less by Tax on February 05 2010, 22:12 Find this comment inappropriate? Report it

@C.J. Says First lease renewal recently completed, up 6% compared to last year. Just curious, did your dividends from your shares, interest from cash on deposit (or drawings from C.J. enterprises) also increase by 6%? Im fairly sure your rent will ;D by andrewa on February 05 2010, 23:48 Find this comment inappropriate? Report it

@Tax You're right. Technically innaccurate. SARS will be very cross if you try to pull that one. by andrewa on February 05 2010, 23:50 Find this comment inappropriate? Report it

Oh dear Getting a rent increase - home rent up 9% after 2 years (which is a 6% FALL in real terms) and office rent up 1% a year over next 2 years. So in real terms rents are getting cheaper - I think I can live with that. I could probably negotiate a lower . .more residential increase - remind the landlord that the number of renters defaulting are up 200% or more. But then again the landlord has just spent a months rent on repairs so feel a bit mean complaining too much. . .less by CJ Says on February 06 2010, 15:38 Find this comment inappropriate? Report it

CJ what K** is this? what you going on about real falls ? Just face it your rent is going up ! and shut up.. plonker by Real deal on February 08 2010, 10:49 Find this comment inappropriate? Report it

Property investment quite complex Hey People, What CJ is saying is not 100% untrue, but CJ you might be in denial because you are generalizing quite a complicated subject here. Property investment might look not to be lucrative but it can be - you need to know your market place (just as . .more you are doing research with your stocks, we do with our properties). Yes in the end property investment might be more time consuming and for that reason it has to give you bigger returns (if you do it right). In the end it comes down to the following for me - Do what you love and you might find a way to make it lucrative. No need to compare real estate with stocks & bonds - because you cannot compare apples with oranges - no matter what you do. . .less by CL on February 10 2010, 16:22 Find this comment inappropriate? Report it

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