Inheritance-What's the best way to invest

[amisraelhai]

Inheritance - recently lost my father, and about 5 years ago, he bought an apartment in Stellies in my name as an investment. The property brings in R16500 in rental monthly. When we bought the apartment, we only bonded R400 k in 2019. I also inherited about R1.4 m in cash, and I have about R150k in debt which I'll settle. The question is, what do I do with the money?

This was my thinking. Take the R1.2m and buy 2 townhouses in Gordon's bay in a security complex. (R900 000 each) The rental market currently gets R8500 rental for each and levies are R890. Wife is in the property industry so she has all the connections and deals.

What's the best way to buy it? R600 k cash deposit on each and bond R300k on each? I have taken into account transferring costs (which I'll settle personally)
The total bonsld costs and levies will be R14400+- but the rental income will be R33 500.

This leaves me with R20k a month.
What do I do with that 20K

Options

1. Pay R15k a month (5k extra into each bond essentially paying double bond) ? Save 5k...

Or

1. Do I contribute to my pension fund.

Last facts..

I'm 39, married . Between my wife and I we earn about 80k after tax so don't need the money currently.

We don't have a pension at all. Cashed it in to start a business.

Thanks everyone

Buy a donkey.. Baie dankie

 

[cerulean123]

@amisraelhai You get a tax deduction of up to max of 27.5% of taxable income (max 350k) per annum for
putting money in a pension. So I would recommend that. Also having invested so much in property in one area you would benefit from having diversified a bit.

 

[gifford26]

@cerulean123 Can only touch when you retire. And not all of it. This is good advice but the cash flow implications can’t be forgotten

 

[lawrence7]

@cerulean123 Only to get taxed befok when you withdraw it once retired

 

[freddied]

@amisraelhai Dude - take all that cash offshore. Put it in something like the MSCI World index.

Property is complex and tenants can be a nightmare. Have a look at what net yield you could get from your plan and compare it to MSCI world returns over the past 5 years (which are also passive)

Also, you guys should optimize tax. Use RAs and open TFSA

I know a brilliant advisor that could help you

 

[amisraelhai]

@freddied I know nothing regarding investing off shore.. sounds fancy, but risky?

 

[mysticpass]

@amisraelhai Risky in what sense? That over a 20 year period you can permanently lose your money? Absolutely not. You'll see value of your accounts change from time to time, yes. You should be fine over a long period of time if you believe the world economies will still function and capitalism will still exist in it's current form.

Carefully consider putting money offshore as suggested to diversify from 1 - the specific risk associated with concentrating so much in only property, and 2 - the political risk in any one country, including S.A..

 

[timerow]

@amisraelhai Why do you want to invest in property? It's illiquid, tax inefficient, exposes you to unhedgable country-risk, and has overblown return characteristics.

The core of any investment portfolio should be equities, and you seem to have very little of that. This is a great opportunity to change that.

 

[exoregonsoldier]

@amisraelhai

• Put money into RA = Tax efficient but not liquid
• Put money into Bonds = Tax inefficient but more liquid

Generally I advise people to pay off homeloans agressively, however in the case of investment properties remember:

Your rental income is taxed as income. You guys are in a relatively high tax bracket so thats not good. You can deduct Rates, Levies, costs but at the figures quoted you will still have profit for SARS to tax.

Interest on the homeloan can be added as a cost against the income which will probably zero your taxable income.

Rental income of 33.5k will attract a lot of tax. Do you calculations on those properties in terms of the gross yield, net yield and then net yield after tax.

It is probably worth keeping the bonds high, putting spare cash into an RA for the deduction and then rolling the property income possibly into more properties.

Either way its worth chatting to an accountant that has a working brain to help optimise this all.

 

[amisraelhai]

@exoregonsoldier This helped a lot, thank you

 

[exoregonsoldier]

@amisraelhai Cool, having the propertied paid off can be advantageous if the market tanks, rentals suffer etc. so it's also a question of how much risk you want to take. But with rates likely to come down it's probably alright to be a bit over leveraged.

 

[amisraelhai]

@exoregonsoldier So if I have 1.2 cash now and can only contribute 350k a year. What do I do with the other 850?

 

[yakuda]

@amisraelhai It sounds like you're a bit over exposed to property.

I'd start a RA / pension asap -- for the tax benefit and peace of mind. RA's you can touch at 55 y/o, so it's only fixed for 16 years.

 

[ffriemann]

@amisraelhai Even if only a TFSA, I strongly urge you to consider contributing to a retirement fund.

 

[lovedaisies]

@amisraelhai You'll save a bunch of costs (bond registration, deregistration, attorneys etc) if you buy one property cash instead of bonding two.

Definitely try to max out your pension/RA contributions. If you exceed the R250k/yr limit, the excess carries forward to tax deductions in future years.

 

[katzby23]

@lovedaisies This is the most practical comment on this thread and the best advice for OP. One small correction is RA limit is 350k. But still sound advice.

 

[47ford]

@amisraelhai Serious mistake not having a pension .

 

[specialguest]

@amisraelhai Start by talking to a professional tax consultant, not an investment broker who will suggest RAs. Use the money as deposit on the properties while keeping the bond payment high enough so that rent breaks even. Keep a fair amount of the money stashed in an easy access account “money market” for when things go wrong with the property. Option 2, make deposits on property as much as possible, take the 20k and use that to fund the next investment property, but keep an emergency fund

 

[amisraelhai]

@specialguest This was solid advice, thanks

 

[resjudicata]

@amisraelhai Avoid Green Bay if you are buying.