Buying second house as investment

[Alwyn Swart]

Hey guys,

I'm going to start off by confessing that I have limited knowledge on the subject and this is part of 'doing my homework'... If that makes sense...

Okay, hypothetically speaking ... Say I have a small house currently and still owe R400 000 on the bond and I want to buy a second house for 1.2 million and rent out the smaller one do I:

1. Apply for a bond for 1.2, probably get a 80% loan, pay the R240 000 up front to the bank (savings).

or

2. Apply for a bond for 1.2, probably get a 80% loan... right... I ask the bank to reevaluate my small house, extend the current loan and take the money I get from the reevaluation and pay the deposit of the new 1.2 loan...

I'm thinking, my small house will give me a rental income of R4500, that is currently more than my bond payment on the small house, meaning tax wise I'm making a profit every month right, in other words I'll have to pay tax on my income... Now, increasing the small house bond so that the repayment is more that the rent income I will be getting I'm not making a profit I will not have to pay tax on my income for the house (business)... right? In the process of increasing the bond amount on the small house I'm paying the deposit on the big house decreasing that bond amount a bit as well...

My other option is to sell the small house and use the money to pay off a big chunk of the big house band... but I'm leaning towards keeping the small one...

What do you guys think?

 

[etwylite]

For tax purposes, only the interest (not capital) on the loan is deductible against income. Additionally you must take into account other costs which are deductible. Rates, Levies, insurance, security etc etc.

Also SARS will not recognise the new loan against your income as it was not required to procure the income producing property.

 

[Alwyn Swart]

Thank you etwylite for your reply... I have run your reply through Google Translate but I'm still struggling to understand if what you are saying is positive or negative...

If you have time and patience, could you maybe explain it... umm... Explain it like you are explaining it to your mother in law

 

[etwylite]

I try not to talk to my Mother in Law

You are trying to reduce your taxable income from renting. SARS will not recognise any new loan you take out on your rental property for deduction as it was not required to procure the income producing product (house). The monthly interest on your current bond on the rental property IS deductible.

Additionally you could possibly claim for levies (in a sectional title unit) or insurance and security (if you paid these) and rates as expenditure against the rent to reduce your income. These are legitimate expenses in the course of your business of renting out. Also the cost of maintenance(not improvements) is deductible.eg getting a plumber to clear a drain etc. a garden service etc

eg
rent 4500
rates 300
insurance 200
interest on loan 1000
levies 500

your income would then be R2500 per month

remember the object of renting to is to make a profit (its a business). Over the course of a year you may have a month where the unit is vacant (between tenants) and you have expenses and no income so make a loss in that month.

 

[HavocXphere]

CGT will kill you...no primary res deduction for 2nd house.

 

[rrh]

If you purchase a second house with the objective of renting it:

1. The tax deduction is limited to the interest on the mortgage plus running costs.
2. The mortgage must be taken on the second house. If you finance the second house by increasing the bond on your current house SARS will not allow the 'interest on mortgage' deduction.
3. The expenses incurred in 'maintaining' the house - e.g. rates / insurance / repairs etc. are also tax deductible;
4. When you sell the house you will be liable for capital gains tax.

 

[Alwyn Swart]

Wow, thank you etwylite, I had it all wrong... I was under the impression that if your bond repayment amount is bigger than the rent income you have to pay no tax...

Rates (municipal) is about R300, interest on the loan I see is R2800 (had a look on quarterly statement), insurance R280 and levies about R200 = R3580

What about electricity and water, is that also deductible?

Okay, so you deduct all you expenses from your income and then only pay yearly tax on the income amount right? What part can one claim back, meaning money in my pocket I was under the impression that a second home, a business, has many 'tax breaks', ways to get some of my hard earned cash back in my pocket

For the record, if I go through with this I will consult a professional when doing my tax, this is just to understand what I'm getting myself into...

Again thank you for all the info so far

 

[HavocXphere]

I was under the impression that a second home, a business, has many 'tax breaks', ways to get some of my hard earned cash back in my pocket

The bond payments usually kill any cash in pocket. The benefit is more of a long range thing. i.e. At the very end you've got a house with a paid off bond.

 

[Alwyn Swart]

Thank you HavocXphere, when I started typing this thread I was positive about the new house and all the tax 'perks', I was seeing the glass half full... NOW I'm searching for the glass, I think the tax man took it

 

[czc]

The interest on homes is always quite high. Getting that back is surely good.

 

[hellfire]

Thank you HavocXphere, when I started typing this thread I was positive about the new house and all the tax 'perks', I was seeing the glass half full... NOW I'm searching for the glass, I think the tax man took it

Bit of a resurrect, but anyway...

If you have an access bond on the rented property, just keep withdrawing capital amount from the bond. In this way, you keep the interest portion of your monthly instalment maximised, and thus maximise your tax benefit.
You can just deposit that capital amount into your other bond.

 

[surface]

Bit of a resurrect, but anyway...

If you have an access bond on the rented property, just keep withdrawing capital amount from the bond. In this way, you keep the interest portion of your monthly instalment maximised, and thus maximise your tax benefit.
You can just deposit that capital amount into your other bond.

Another resurrect and a silly question in case anyone here has answers please. Strictly speaking, above method of withdrawing capital and claiming tax benefit, is this legal?

 

[Freaksta]

CGT will kill you...no primary res deduction for 2nd house.

Well CGT is a cost, the only reason you are paying it is because you made a gain. It's as with any normal tax, you get money you have to pay some of it to the tax man. It's not like you have to sell something else to pay the taxes. Pay the taxes when they're due and instead of making R50 you only make R30.

 

[Not_original]

Ressurection time again

Say I have a tenant living with me on my primary ( and only for now ) property . Does the tax breaks also apply ? Doubt it but had to ask

 

[CheekyC]

Rather invest with alan gray or coronation. Far better returns than the capital appreciation on a house

 

[creeper]

Read http://www.moneyweb.co.za/moneyweb-investment-insights/your-house-is-not-an-asset

 

[F1 Fan]

Rather invest with alan gray or coronation. Far better returns than the capital appreciation on a house

I agree with this. Alternatively, pay off your current bond as fast as you can. Once fully paid, you can buy the new house. This is under the assumption that you are currently living comfortably in the small house. If not, then I suggest you sell the small property for as much as you can and put a huge deposit on the new house.

My thinking is simple, the sooner you pay off your main property, the less interest you pay on it. Yes, the rental income from the second property effectively covers the bond, so you are effectively earning on the increase in the value of the house. But, you are having to pay a higher interest amount (not percentage) on the primary property because you used a smaller deposit.

Make no mistake, you will earn slightly more having two properties, I just think it's too little to actually make it worth the effort.

 

[Gnarls]

^I disagree with this.

Rather invest with alan gray or coronation. Far better returns than the capital appreciation on a house

But what about the income growth ie rental yield?

 

[Billy]

Rather invest with alan gray or coronation. Far better returns than the capital appreciation on a house

This is very true if one compares investing R500K in a property or R500K in AG. However if one does not have the money to start with, getting the assistance of tenants and SARS to buy a property can make sense.

Once the property is paid for, sell it and move the money to AG.

 

[Billy]

^I disagree with this.



But what about the income growth ie rental yield?

Not as good as investments. Check for yourself. Figures are available online.