How to buy your dream home

2010-11-06 11:44

Gail’s current situation

The Troyeville flat
This flat is fully paid off and earns R2 000 a month from the property after costs. Gail believes she would only get around R150 000 for the property if she sold it. That means the property is giving her an income of around 16% a year which is very good considering cash would give her 6% at most.

The Yeoville property

Gail lives in this property and has a relatively low mortgage on it.However she is looking to sell it and buy her dream home.

The Fleurhof house

Gail bought this for her mother who passed away recently. She receives around R3 300 after costs. Gail believes that this is a good investment and because of sentimental reasons she would prefer to hold onto the property and use it as an investment.

The future

“I am looking at properties in Killarney or Illovo. I want to move up because I’m getting too old for Yeoville and want a ground-floor garden flat in a better neighbourhood. I’m optimistically hoping to buy for up to R1.4 million “I am happy to sell Yeoville and Troyeville if necessary. And can also scale down my price expectations if necessary”.

Gail is also concerned about whether or not she is saving enough for retirement.

She has her company pension fund and saves regularly into a 32-day account, but this she tends to use for holidays rather than long-term savings.

“I would like to start investing this amount more wisely into an investment that brings a greater long-term return.

“I could even increase it as I am a selfish single and I know I could manage my money better and spend less on rubbish I don’t need.”

The solution
The properties

Gail already has significant property exposure and should rather sell her Yeoville home so that she can put down a good deposit on her new property.

FNB Home Loans provides a service which would assist Gail in valuing her property as well as with a new potential home. FNB would also give her an idea of the costs of buying a home so that these can be factored into her budget.

Armed with this information upfront, Gail would have a good idea of what she could expect from the sale of her Yeoville home and what would be a fair price for her new property. With this information Gail will be able to make an informed decision. She will also have a clear idea of her affordability and whether or not she would need to sell her Troyeville property as well.

The income from both the Troyeville and Fleurhof properties will be considered when FNB evaluates her affordability for the new property.

Gail also needs to consider the tax implications of receiving rental income. Rental income is taxable, but the interest portion of the mortgage repayments is tax-deductible.

It may make sense for Gail to take out mortgages on the two rental properties in order to put down a bigger deposit on her new home. This would be a tax-efficient way for her rental properties to help her buy her dream home.

Property as a retirement plan
According to Mike Heeley from Alexander Forbes the rental income from the two properties would be an excellent supplement to Gail’s income in retirement.

“The nice thing about rental properties is that you benefit on two fronts: the rental income or yield as well as capital growth on the property. Capital growth is not always guaranteed however as the value of your property might be affected by the deterioration of the area in which it is. It is important that you keep an eye on this,” says Heeley.

The rental income she receives can be used to supplement her income in retirement. It should also keep up with inflation and so it can form an important part of an overall retirement plan.

Heeley warns however that rental properties come with their own challenges and you need to be prepared to deal with these as and when they arise – for example managing tenants and keeping up maintenance. “If you are not prepared to deal with these issues then it would make sense to sell them and invest the proceeds elsewhere.”

In terms of Gail’s retirement strategy Heeley says as long as the area maintains its value Gail should look at keeping the Troyville property rather than selling it to pay for her new home.

If she does sell the property this would reduce her income by around R2 000 per month, which means she will need to save more in order to make up this shortfall.

“The problem is that she will be buying a home that is worth significantly more than her current properties and this means taking out a bond. The additional bond repayments will eat into her capacity to make additional savings,” says Heeley.

So it is important that Gail looks carefully at her affordability before buying her new property. She needs to try and stick to a budget that does not require her cashing in her property investments.

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