One may invest in property via a direct purchase of tangible property whereby they can become the owner if bought out right or the eventual owner if purchased via a bond. As of March 1, 2015 there were tax changes with regard to transfer duty costs. Home buyers have a tax relief for purchases of R750 000 and below but for values above this the tax table applies.
Another government cost is the fee for transfer at the Deeds office. This applies to bond costs as well. Additional fees included in both transfer and bond costs are the attorney fees, Post and Petties, Electronic Facilitation costs, Deeds Office Search fees and VAT.
So for example if the purchase price and bond was R1 million then the combined transfer and bond costs would be approximately R43 731. However if the purchase price was R 1 million but no bond was required then only transfer costs would apply, which would be approximately R26 329. On-going costs could include building insurance cover, bond insurance cover, bond fees and possible maintenance costs.
If one cannot afford to purchase direct property, does not qualify for a bond or cannot afford one or if they simply want an option with less hassle then listed shares property market is a decent alternative. Costs involved here are the Total Expense Ratio (TER), which generally includes the administration fee, advisor’s fee and fund manager’s fee.
So your net return is the fund performance less the TER. This can be a lump sum investment, a recurring monthly contribution or a combination of both. While property could very well be a lucrative long term investment, there are certain risks that must be considered. For direct property investment purchases, these could include damage to property due to negligent tenants, which may result in possible on-going maintenance costs.
Also if there are no tenants the property will not be occupied hence not generating an income. Always consider a suitable location due to the market value possibly changing due to the conditions of the surrounding area. Also if one needs to dispose of the property to convert into cash, it could take a long time to sell for the right price.
While listed property unit trusts are far more liquid, possible risks involved could be that due to market volatility when the investor is ready to sell units, the price could go down and the investor is unable to wait for it to stabilise and return to a favourable price.
Suffice to say that property should be considered as a long-term investment asset class and all fees and expenses should be taken into consideration but the return could be a very handsome one eventually.
