Property investments – what you need to know

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When it comes to property investment there are various ways in which you can invest in property. From your own home, holiday home to a business property amongst many other types. If you’d like to invest in property here is what you need to know.

Your home is also a type of property investment as it provides rent free accommodation, however it may also yield a return in terms of its capital growth in the market. Its capital growth might be difficult to realize unless you trade down or move to another country or region where the property is cheaper.

If you buy property that is not for your own use you gain a more tangible return. These types of property investments can be divided into four categories:

• Holiday Home
  A holiday home provides rent-free holiday accommodation for your family and friends, and hopefully maintains or increases its value providing a supplementary, passive income.

• A home for your children or relatives
  This property could also increase its value and if it is not accommodated by your children or relatives it could be rented for additional income.

• Business Property
  A business property could be anything from a guest house, a shop or office to a beauty salon. As long as it is for business purposes.

• Property purchased purely for investment.
  Property could be invested purely for a capital investment, to provide an additional, regular income or even for both purposes.

If you are considering property investment it should be at least for the medium to long term which is between 10 and 15 years. Property isn’t as “safe as houses” and it could be very risky to invest in the short to medium term between five and ten years.

If the property will be let you must take into account the income tax and property tax. Capital gains tax in South Africa is charged at the normal income tax rate, and because the investment property is not your main residence you will pay tax on any profit made. When you sell the property you need to recoup 10 – 12% of the purchase cost.

If you have purchased property with the intent to let you must make sure that the rent covers the mortgage and running costs. But keep in mind that the rental rate and letting seasons vary from town to city to region. A rental area and occupancy that is fruitful might not be in a year. The gross rental yields (the annual rental as a percentage of the property’s value) are between 5 – 10% in most areas although yields of 15% and more are possible. The net yields (after expenses have been deducted) are 2 – 3% lower.

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