Best way to make spare money grow

[Dr Who]

Hi All

So I have a challenge which I have been pondering. Currently I have a House ( newly purchased ) and in need of upgrading, a Flat which is going to have tenants in it and some spare cash each month.

Lets assume for this purpose I have a secondary income each year that is around R200k after tax, this money should now be put to work for me in the best passive way possible. So below are some of my options but which would you suggest:

1) Old house which has potential could over time be restored and upgraded. I purchased an old house is a good area and could probably spend at least R2mil before I have over capitalised. Do I spend the 200k each year on improvements for say 5 years?

2) Do I just pay off the bond on the new property in 5 years with the extra 200k per annum?

3) Do I pay off the flat bond over 5 years ? This will have a tax impact as I will not have interest to deduct as an expense for tax purposes .

4) Do I invest in the stock market, seeing as the Top 40 has been going sideways I have not opted for this?

PS Both my purchases are in locations in CPT which are in high demand and have had massive growth over the past few years.

The conservative approach would be to pay off debt and then save on the compound interest but at best this will yield 10%, aggressive would be to improve house and let both the improvements and house market compound my gain and pure passive would be to look for a 3rd investment property. The 3rd will not be possible for a while as I am over exposed at current.

 

[nivo]

Diversify. Look at other ways of investment.

Markets are bad now, will definitely improve in the near future.

Speak to a financial planner, I would suggest a company like BESPOKE FINANCIAL SERVICES. They are in Joburg but there must be some good Finance Gurus in Capetown.

I just saw they have a branch in Capetown,
E503 The Quadrant, Wilderness Road.
Claremont
WC
Phone: 083 700 3600

 

[panayi]

I would put it into your primary residence bond for a couple of reasons:
- bonds are weighted for you to pay interest off first in the payment schedule - this means any extra cash going in reduces the principal amount and thus you will pay less for the house overall
- you might think you are only get 10% "return", but that is effectively tax free and guaranteed. Anyone else offering similar deal ?


Depending on the state of the house, look at making it more comfortable, more efficient, add things that anyone buying it would pay for, etc. That being said, I think sometimes you need to live in a house for some time to really figure out what changes will work and what not.

Just my 5c - and not financial advice at all !!

 

[raeesdawood]

Pay off all existing debt...before anything else

 

[Thor]

/subscribes

 

[hj2k_x]

Pay off all existing debt...before anything else

Unless the debt is cheap and you can get better returns elsewhere...

 

[supersunbird]

Hi All

So I have a challenge which I have been pondering. Currently I have a House ( newly purchased ) and in need of upgrading, a Flat which is going to have tenants in it and some spare cash each month.

Lets assume for this purpose I have a secondary income each year that is around R200k after tax, this money should now be put to work for me in the best passive way possible. So below are some of my options but which would you suggest:

1) Old house which has potential could over time be restored and upgraded. I purchased an old house is a good area and could probably spend at least R2mil before I have over capitalised. Do I spend the 200k each year on improvements for say 5 years?

2) Do I just pay off the bond on the new property in 5 years with the extra 200k per annum?

3) Do I pay off the flat bond over 5 years ? This will have a tax impact as I will not have interest to deduct as an expense for tax purposes .

4) Do I invest in the stock market, seeing as the Top 40 has been going sideways I have not opted for this?

PS Both my purchases are in locations in CPT which are in high demand and have had massive growth over the past few years.

The conservative approach would be to pay off debt and then save on the compound interest but at best this will yield 10%, aggressive would be to improve house and let both the improvements and house market compound my gain and pure passive would be to look for a 3rd investment property. The 3rd will not be possible for a while as I am over exposed at current.

Mix of 1, 2 and 4.

R120 000 into 2 R(80 000/R60 000?) and 1 (R40 000/R60 000?) and R80 000 into 4.

As the panayi said, the pay into 2 is a guaranteed return of whatever your interest rate is. The money spent on 1 makes your living place nicer and hopefully adds value if spent correctly. In 3, the interest and other costs is a tax write off. No need to pay that off quicker.

Onto 4:

I'm assuming you already save at least 15% of primary income into some kind of retirement fund (20% would be better, 27.5% best).

If you don't already have a TFSA then maybe put R33 000pa/R2750pm into that:

I'd go 50% local/50% foreign with mix of equity and property in that TFSA:
R950 - CORESHARES Top50
R950 - CoreShares S&P 500
R425 - CORESHARES Proptrax Ten
R425 - CORESHARES S&P Global Property

Then the rest of the R47 000 I'd put into:
R 35 000 - CoreShares S&P 500 (or some other foreign equity ETF/s or Unit Trust/s)
R 12 000 - CORESHARES S&P Global Property (or some other foreign property ETF/s or Unit Trust/s)

The reason doing that 75% of retirement savings and all your property is in SA, and the TFSA will be half/half.

Anyway, thats what I would do in your position.

 

[HavocXphere]

Pay off bond. Interest rates are only going one direction - up.

 

[Tomtomtom]

3) Do I pay off the flat bond over 5 years ? This will have a tax impact as I will not have interest to deduct as an expense for tax purposes .

Mix of 1, 2 and 4.
In 3, the interest and other costs is a tax write off. No need to pay that off quicker.

Work out what the impact is exactly, before dismissing it.

Example:
R200 income, R100 deductible expenses. So R100 taxable income @ 40% = R40 tax. But total expense is R140.
R200 income, R0 deductible expenses. The full R200 is taxable income @ 40% = R80 tax. But the total expense is also only R80.

It doesn't make sense to spend more in total just to ensure less of it is tax.

 

[supersunbird]

Work out what the impact is exactly, before dismissing it.

Example:
R200 income, R100 deductible expenses. So R100 taxable income @ 40% = R40 tax. But total expense is R140.
R200 income, R0 deductible expenses. The full R200 is taxable income @ 40% = R80 tax. But the total expense is also only R80.

It doesn't make sense to spend more in total just to ensure less of it is tax.

Ok, I get what you mean, but house bond is 100% expense.

Lets rather put it this way then, when house bond (2) is settled put all that money into 3? And then when main home is how you want it (1), also put that into 3?

 

[WaxLyrical]

Pay that bond. It's a guaranteed return on investment.

 

[Dr Who]

Hi All, its good to see all the idea's and the notion of pay debt first being a big one. But lets deconstruct the current status quo:
A) Had I invested in the JSE my money would have gone sideways for the last year, over 3 years it would have been a marginal return.
B) Had I payed off the most expensive debt then I would have a lower flat debt and had a higher taxable income. I effectively get a reduction in the interest paid based on my marginal rate of tax saved. Opportunity cost of paying of most costly debt is 40% premium
C) I could pay off my newest debt which is lower cost and thus reduce my primary residence cost. Obtaining a yield of prime - x.

or D) Start looking at ways to make the money work harder for you, so see my below plan ( it might end up being a bad thing but who knows).
Invest the spare money I have into upgrading the current primary residence, this should increase its value as its currently well undervalued but also needs work. I will grow my base cost by the upgrades I do which are not a repair bill. I will have a primary residence capital gain tax relief and will start to unlock hidden value which should yield me a return of just over what I spend.

This should add to the base value of the property and thus the compound value of the hot property market will mean that my growth will be on a higher base, which is protected by CGT up to a point. But as I said I have not done the numbers but in my head this seems of semi-sound logic.

It does require me to be aware of where to spend money. Below is a hypothetical working:
Assume base cost: R3,000,000
Improvements: 200,000
New value: R3,250,000 but this now appreciates by say 10% I have generated an extra R50,000 which will compound and will be tax free.

 

[Tomtomtom]

It does require me to be aware of where to spend money. Below is a hypothetical working:
Assume base cost: R3,000,000
Improvements: 200,000
New value: R3,250,000 but this now appreciates by say 10% I have generated an extra R50,000 which will compound and will be tax free.

Sounds good... bearing in mind it's a leveraged investment so you're taking a fair amount of risk. A wobble could wipe out the R50k assumed gain, the R200k nominal improvement, and it doesn't have to stop there. You really do not want to be forced to sell any time soon. Check: job security, health, dependents, risk/security in second income, any other debt?

I reckon you should have a solid NAV before doubling (tripling?) down on leveraged property... perhaps you do?

 

[supersunbird]

Hi All, its good to see all the idea's and the notion of pay debt first being a big one. But lets deconstruct the current status quo:
A) Had I invested in the JSE my money would have gone sideways for the last year, over 3 years it would have been a marginal return.

Even outside the JSE, in dollar terms one would have been flat (R strength), but this is all for a long term investment, isn't it. Which is why I say half/half in some products and all outside of those goes to overseas investments.

You shouldn't be too much in just one very local area, geographically small, property market. Diversify. Well, that's my opinion in any case.

 

[Dr Who]

Ok just for those who recon I am crazy below is the other items which I have for security:
1) 15% pension plan contribution with 50/50 split between 2 strong fund houses. I should get 60% of my current salary at retirement age assuming I continue this investment.
2) Investment property 1/3 bonded based on current appraised value

In 2013 I dabbled on the JSE and made good money, also did this in 2015. Then went for a wild bet on Lonmin and created the fun we all had when we watched the share split. Ended up 80% up but then lost that all as I was greedy, getting what I paid back. Now its time to try my hand at speculative property restoration and see what happens.

Way I see it, if I make loads of money I can buy an even better place ( should I need ) or if I dont I end up with an amazing family home which I can keep until all the water runs out in CPT and I die parched and thirsty.

 

[HavocXphere]

...

Simply put you're not going to be able to match the risk-adjusted return of paying off a bond.

So yeah you can crunch scenarios where other options work out better mathematically...but those will all include an (implicit) assumption that things go the right way.

Now there are scenarios where leveraging property with debt intentionally does make sense, but they're fringe cases. (This is @saturnz favorite topic)

If you do feel like taking that gamble, I'd say do so with prop rather than shares. Though as I said...I wouldn't at all.

 

[Diesal]

Pay off bond. Interest rates are only going one direction - up.

Interesting, in my opinion, the SARB has very little room to actually raise rates, given that we are officially in a recession. One could argue that if inflation drops, and the USDZAR is stable, it may give them room to start cutting rates.

The next meeting is this month (18-20 July), and I'd expect them to keep the repo rate at 7%

 

[HavocXphere]

Interesting, in my opinion, the SARB has very little room to actually raise rates, given that we are officially in a recession. One could argue that if inflation drops, and the USDZAR is stable, it may give them room to start cutting rates.

The next meeting is this month (18-20 July), and I'd expect them to keep the repo rate at 7%

I meant long term. Given that OP is talking about property investments this thread clearly has a multi year horizon.

SARB primary mandate is price stability, not growth (for now). Gov is fast running out options on all fronts yet they still want to do stuff like NHI and nuclear build. With further downgrades looming they're going to resort to a monetary policy "solution", which will boost inflation. Inflation goes up....gov has to force it down. The whole thing is heading for an unholy shtstorm imo and I'd not want to be sitting on debt when that happens.