Property investment, cash or bond?

[hschutte]

I'm looking to purchase a property to rent out. I have the cash to buy it outright but I'm thinking if I take for example a 50% bond I could buy another property in a few months again with a 50% bond (subject to the bank approving this of course).

Would love to hear some comments on the 2 options and what you think would be the better one.

 

[Johnatan56]

Interest rate on the bond? Size of the bond?

 

[hschutte]

Interest rate on the bond? Size of the bond?

It would be prime +1, and the purchase price of the house would be around R650k. I should then be able to rent it out for around R6k per month if I use the other units in the complex as a guideline.

 

[P924]

Take a 100% bond for tax purposes.

 

[Re83L]

Sorry for an indirect answer...

You probably won't get better than say prime - 1% on the bonds.
So that's around 8.25%

Now if you were paying off your main property (on which there's no rental income):
Not an exact calculation, but if you're paying a marginal tax rate of 40%, then you need an alternative investment that earns .0825/.6 = 13.75% interest before tax to be in the same position as dumping extra cash into a bond on your primary investment..

On a secondary investment (rental property):
You can offset the interest proportion of your bond repayments against your rental income. (and levies etc)
Thus it makes much less sense to dump a larger proportion of cash in here.
It's not too tough to find alternative investments where you will earn better than the interest you're blocking, and in addition, with a larger deposit, the interest part of your bond repayment becomes smaller..

Example: You have a rental property worth R800 000, repaying around R6000 a month, of which about R5800 a month is interest.

If you rent the place out for R5500 a month, you won't pay any tax on your rental income, because it's less than the R5800.
Say you choose to only have a R400 000 bond on it, repaying R3000 a month (R2900 interest), you would have to pay normal income tax at your marginal rate on the difference between the rental income (R5500) and the interest on the repayment (R2900) = R2600

Thus if you're at a marginal rate of 40% you would have to give SARS R1040 of it each month, which makes it less worth it to have the property.

Last thing, and I'm not a financial adviser or anything, but diversify your assets, consider buying equities, include some foreign exposure as well..

So my answer in short:
Take as close to 100% bonds as possible
Rather put cash into your primary property (where you stay and have no rental income)
OR use the cash to buy other classes of assets, like equities. Just get proper advice on which equities to buy..

 

[Re83L]

It would be prime +1

Shop around, that's a BAD rate..

 

[StrontiumDog]

Yeah, u can claim the interest and other running costs against the rental income. On paper you may even make a loss in the beginning. You can claim that loss against your income tax you pay on your salary. Etc... I'd suggest getting a good tax consultant when you plan out your strategy.

edit: Re83L beat me to it so take my post as the TLDR version of his

 

[hschutte]

Shop around, that's a BAD rate..

Definitely, was just using that as worst case scenario. I have 2 other bonds at the moment, one for my primary residence at -0.95 and another for a rental property at -1.86 (the good old days). So I suppose I should at least be able to get prime.

Thanks for the detailed info in your other post, much appreciated!

 

[borga]

Sorry for an indirect answer...

Not an exact calculation, but if you're paying a marginal tax rate of 40%, then you need an alternative investment that earns .0825/.6 = 13.75% interest before tax to be in the same position as dumping extra cash into a bond on your primary investment..

That is only if income tax applies to your alternative investment, if capital gains tax applies then you would need a 0.0825/(1-0.4*0.333) = 9.52% interest before tax investment before you would be in the same position.

 

[ProfA]

Just a quick question. How would SARS know you have extra income from another property if you don't tell them? Just curious.

 

[StrontiumDog]

Just a quick question. How would SARS know you have extra income from another property if you don't tell them? Just curious.

Well if you plan to get paid cash I suppose they would not know. Else they probably have access to your bank accounts, so if there is an electronic paper trail then they would know.

 

[ProfA]

Well if you plan to get paid cash I suppose they would not know. Else they probably have access to your bank accounts, so if there is an electronic paper trail then they would know.

Only if they audit your lifestyle which I think is a one in a 10 million chance would they want to review your bank statements. But you would need to deal in drugs and live in a R50 million home with 50 super cars to get lifestyle audited.

 

[StrontiumDog]

Well, depending on what sort of triggers they might have setup, they could reasonably assume anyone with more than a one or two properties must be renting the rest out? Therefore if not declaring rental income for those properties then something fishy going on?

 

[SAdata]

SARS doesn't know if you don't tell them, but if they find out, you will get penalised 150% of the tax you owe (so tax you owe + 150%) + interest on that amount from the start. So if you made 100K net rent a year taxed at 40% per year = 40K tax per year (ouch). But if they find out after 5 yeaars that you haven't been declaring you'll have to pay them around R643k. Considering you only got net rentals of R600k over that period (incl. inflation increases) make a decision on whether you want to tell them or not They are linked to the banks, vehicle houses etc. so they should fairly easily be able to see if you have more than 1 property. But if you do it all cash maybe they won't be able to pick it up

 

[HavocXphere]

I'd be inclined to go for bond to leverage the tax ded. & then invest the cash you would have used in something reasonably stable (non-prop) to achieve something resembling diversification.

Obviously the cash investment will have to bleed to fund the bond payments but thats OK - just make sure you invest the cash in something you can sell/liquidate in small portions.

SARS doesn't know if you don't tell them, but if they find out, you will get penalised 150% of the tax you owe (so tax you owe + 150%) + interest on that amount from the start.

You're a fkin idiot. Not only are your percentages wrong but your advice is just straight up bad. "SARS doesn't know if you don't tell them" - dude they send people to jail for tax evasion. So please STFU about advising fellow forumites to take a chance if you don't know what you're talking about.

edit:

SARS doesn't know if you don't tell them, but if they find out, you will get penalised 150% of the tax you owe (so tax you owe + 150%) + interest on that amount from the start. So if you made 100K net rent a year taxed at 40% per year = 40K tax per year (ouch). But if they find out after 5 yeaars that you haven't been declaring you'll have to pay them around R643k. Considering you only got net rentals of R600k over that period (incl. inflation increases) make a decision on whether you want to tell them or not They are linked to the banks, vehicle houses etc. so they should fairly easily be able to see if you have more than 1 property. But if you do it all cash maybe they won't be able to pick it up

qft

 

[Goliath]

Yeah, u can claim the interest and other running costs against the rental income. On paper you may even make a loss in the beginning. You can claim that loss against your income tax you pay on your salary. Etc... I'd suggest getting a good tax consultant when you plan out your strategy.

edit: Re83L beat me to it so take my post as the TLDR version of his

What he said is good advice.. that's what I'm doing!

 

[SAdata]

You're a fkin idiot. Not only are your percentages wrong but your advice is just straight up bad. "SARS doesn't know if you don't tell them" - dude they send people to jail for tax evasion. So please STFU about advising fellow forumites to take a chance if you don't know what you're talking about.

edit:

qft

The rates are from the penalties tables (2014 updated) in the tax administration act assuming SARS classifies non disclosure of this nature as intentional evasion. - 150%. And 40% is the maximum marginal tax rate - I guess you don't know this because you've never hit it.. In addition I compounded everything for time because that's what you do if you're looking at a 5y period. If you don't agree then tell us what the correct rates are mr wiseass

If you know something about SARSs detection systems that I don't then please tell me. Reporting institutions (banks etc.) do share info with SARS - that's why I said if its cash or through fronts or offshore dealings it's much harder for them to detect.

The point of my post was to discourage people from evading tax - showing both sides - as it's up to people to do what they want and not what I tell them - as I don't want to sound like a dictatorial tonsil - like you!

 

[saturnz]

The rates are from the penalties tables (2014 updated) in the tax administration act assuming SARS classifies non disclosure of this nature as intentional evasion. - 150%. And 40% is the maximum marginal tax rate - I guess you don't know this because you've never hit it.. In addition I compounded everything for time because that's what you do if you're looking at a 5y period. If you don't agree then tell us what the correct rates are mr wiseass

If you know something about SARSs detection systems that I don't then please tell me. Reporting institutions (banks etc.) do share info with SARS - that's why I said if its cash or through fronts or offshore dealings it's much harder for them to detect.

The point of my post was to discourage people from evading tax - showing both sides - as it's up to people to do what they want and not what I tell them - as I don't want to sound like a dictatorial tonsil - like you!

SARS's systems may not be effective but you discount the human element. The OP and a tenant may disagree and the tenant may report him to SARS, or any other person who happens to know about the non disclosure, its not really worth the risk.

 

[Hamster]

I know a little somethin' somethin' about the SARS system. Although there is a certain truth to "they don't know what you don't tell them" it should be noted that it refers to irrelevant data like your cell no that changed. The system can only work with the data it is given and it is unfeasible for them to scrutinise over every taxpayer's ITR14 submission and the like.

BUT, when you hit a threshold value or you are selected for audit for some reason and SARS gets a whiff of an inconsistency you can be in for a world of pain. And don't think because you got away with something two years ago that SARS won't pick it up a couple of years later.

So basically - don't lie to SARS. Tax avoidance rather than tax evasion. Big difference.