Follow Colen’s boot camp journey during the Absa/City Press Money Makeover Challenge
We’ve got to know the contestants a little during the Absa/City Press Money Makeover Challenge these past few months. This week Maya Fisher-French chats to Colen, an area manager, who’s married with three children.
Colen has built a property portfolio made up of five properties which has put him under financial pressure. “We’re struggling to separate the business finance from our personal finances and need a system to ensure that the business is able to sustain itself," he says.
Over the past few months, he’s been working with Absa financial planner JP van der Merwe and Absa home loan specialist Miguel Martins.
Martins explains that Colen has largely fallen into property investment by accident, grabbing opportunities as they arose. “Colen needs to start thinking about how he's going to use these properties to create wealth,” Martins says.
Colen also needs to look at how he can restructure the debt on his properties. He took out a personal loan for one of the properties at a much higher interest rate than his property finance. If he could extend one of his home loans, he could reduce his monthly repayment.
Colen wasn’t aware the interest on the personal loan was tax deductible from the rental income. “Sars provides that expenses incurred in the process of generating an income can be listed as expenses and will be given a tax benefit,” Van der Merwe says.
For example, Colen could deduct his travel to and from the investment properties as well as his cellphone and internet usage for running the business. He can also deduct all maintenance and payments for services.
But he needs to keep a proper set of accounts and invoices to claim the deductions which is why it’s so important for Colen to separate the business from his personal finances.
Van der Merwe says building an emergency fund is also a priority for any property investor.
“If the investor has debt on the properties, an emergency fund of 3-6 months can cover the debts if one isn’t able to find occupants.
“This has become even more evident with the Covid-19 lockdown and the risk of nonpayment by tenants,” Van der Merwe says.
Colen also needs to consider moving the properties into a trust or a Pty (Ltd). A trust is beneficial for estate planning and protection against creditors, while a company structure could be more tax efficient.
Van der Merwe explains that Colen would reduce the percentage of tax he pays on the rental income from 41% to 28% by moving it to a company. However, a company would incur estate duty taxes, unlike a trust, and it could be attached by creditors.
You’ll get different opinions from a financial planner, an accountant and a trust expert as they’ll be looking at different aspects, says personal finance expert Maya Fisher- French. Ultimately, it’s up to the investor to make the best decision for themselves.
In summary, have a long-term vision for how you want your property investment journey to enable your lifestyle.
Then put a power team of specialists in place who’ll advise and guide you to build a robust and profitable portfolio to reach your vision, including surrounding yourself with like-minded investors who’ll allow you to access a wealth of experience and opportunities to learn.
And lastly, understand how the features of a home loan can work to enable you to maximise your growth in a sustainable manner. Martins says there are three rules a potential property investor should consider.
1 Have a smart 15-year plan
Having a clear vision of the life you want to create will determine the income you need to target, the type of investment and the route to take to get there,” Martins says. “Property you buy now will draw cash, but if you buy incorrectly, you’ll get stuck.”
2 Put a power team in place
Treat your property portfolio as a business and have the right team of specialists around you, including an accountant, trust attorney, financial planner and banker.
“You can’t do everything yourself and it’s a better use of your time to look for
new properties instead,” Martins says.
3 Use a bond to enable financing for growth
By structuring your home loan correctly, you can use the equity from your investment property to expand your portfolio.
An Absa Re-advance is based on your original bond value. Once you've paid off a portion of your loan, you can apply for credit back to the original bond amount, based on credit approval.
For more information, follow the journey on social media #CPMoneyMakeover