First Time Investors Tend To Buy A Rental Property First

There's a big difference between an investment property and a primary residence. As the names suggest, the one makes you money while the other gives you a roof over your head. As a rule, primary properties don't make you money, because any profit you make on a sale is generally put back into the next property you buy. An investment property, however, makes money on two different fronts – rental earned from tenants and when you eventually sell, profit from the sale.

Any expert will speak of the importance of buying a property as soon as possible and while this is true, should you be concentrating on buyer your own home or should you be securing your future by investing in an investment property first? In part, the decision will be dependent on personal circumstances.

For example, some first-time buyers qualify for the Finance Linked Individual Subsidy Programme (FLISP). This initiative is aimed at those who earn too much to qualify for an RDP home, but too little to afford a buy a new home. You can apply for the subsidy if you earn between R3 500 and R15 000 per month. The amount of the subsidy varies according to how much you earn and can only be applied for after you have found a property and applied for a bond.

First-time buyers often qualify for a 100 percent home loan which means that they don't have to save for a deposit. You also don't pay Capital Gains Tax on the home in which you reside on a permanent basis.

On the other hand, owning an investment property means that you will receive regular income from your tenants who, for all intents and purposes are paying off your bond. Although you will pay tax on any profits made on an investment property, you can claim for expenses such as insurance, maintenance and rates and taxes as well as body corporate levies. On the downside, you will pay Capital Gains Tax when you sell.

The idea of buying a home that you're not planning on living in may be a bit much to stomach for some, although this doesn't mean that they should overlook the investment angle completely. There is a way to get the best of both worlds. Property should never be regarded as a short-term investment, but this doesn't mean that you have to live in your first home for years on end. Although much will depend on your finances, it may be an option to rent out your first home in due course and buy a second property. This is particularly viable if the first home was bought at a good price and the bond repayments are fairly low. The other option (again if finances permit) is to buy a more expensive home, but stay in the first for a couple of years. This method could allow you to charge a higher rental for the second property, helping to pay off the more expensive bond.

Getting onto the property ladder may be important, but it isn't necessarily going to secure your financial future. Climbing up the same ladder by building up a healthy property portfolio could very well set you and your family up for life and is something that everyone should think about doing, sooner rather than later.

Source:  Private Property/Lea Jacobs