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An Italian property expert suggests crucial pointers on how to safely purchase a villa or apartment in Italy and make sure you steer clear of some common mistakes.
Recent changes in the Italian tax regime have cut house-buying costs by 10-15%. Combined with the country's ceaseless attraction it means there has rarely been a more opportune time to invest in Italian property. Yet as with any house-buying process, there are commonsense guidelines to follow to ensure everything runs to plan. Here are the 10 most essential:
This question of what is IRR Internal Rate of Return is one of the most frequently asked questions and often even when explained property investors that do not have a financial background, do not fully understand this concept. In this article we are explaining in the simplest way possible what is IRR or Internal Rate of Return.
If you often read these articles, you will know that the old section 13(ter) has expired. Until recently, this was the only section which allowed owners of residential property, which was used for trade purposes, to get tax deductions on the cost of immovable property. This section was effectively repealed on 20 October 2008.
The good news is that there is a new section in place now which seems to be a lot better overall for owners of new, residential units. Section 13(six) effectively came into place on 21 October 2008.
Last year, we published an article regarding Section 13ter of the income tax act (Income tax act 58 of 1962) . At the time, this was the only section available to property investors that hold residential property. The section allowed investors to claim tax deductions in respect of the value of the property.
At the time, the section stated the following, in short:
A Taxpayer can deduct from their income, an allowance in respect of the cost of any residential unit which is part of a housing project. The deduction allowed is equal to:
Ten percent deductable in the first year five or more units are rented or occupied
Two percent in the first year and every year after that
The section was however very specific about the definitions of “housing project” and “residential unit”.
Housing project:
Had to be any project for the ERECTION of a building or several building in South Africa; consisting of at least five residential units.
Residential unit:
Any self contained unit of at least one room (excluding a hotel or hostel),
ERECTED after 1 April 1982 and as part of a housing project as defined above,
To be let out to a tenant for deriving profit or to be used by any “bona fide” employee of the taxpayer.
Basically, if you built the units and there were more than five of them, each being self contained and were renting them out; you could claim the tax deduction on the costs of the building. This was very good news for investors with lots of capital that were looking for rental income opportunities.
Unfortunately, there is now bad news.
As some may already know, the tax act is very subject to change. Section 13ter has been amended.
Having read the first two articles, you should now have a good understanding of the concept of “crossing the Rubicon”. In this article, I give several court case examples which dealt with the more intricate issues and helped to assess intention.
As we previously explained, the “Lydenberg” case stated that intention is the golden rule and hence, a court must look at the intention of the taxpayer when deciding the nature of a transaction. The moment the intention has changed, the taxpayer has “crossed the Rubicon” and the nature of the transaction changes.
In these difficult times, most people are starting to feel the squeeze in their pockets and feeling strongly that their investments are not performing as well as they should.
A very important concept to look at when investing is your cost of capital. All companies and investors need money in order to start or expand activities; this money comes at a price. Large companies usually have more complex structures, comprising of both funds generated through debt and issuing of equity instruments (such as shares or bonds).
However, the small property investor is usually only worried about two facets: the original capital invested in the company and any bonds applicable to the property. This cost is therefore easy to calculate. If you have a bond against an investment property of 15% per year, the cost is 15%.
The property market in South Africa is full of foreign real estate investors (especially in Cape Town); should you be one of these real estate investors, you might find yourself confused as to how to manage your tax affairs.
Also local property investors that are selling their properties for a foreign resident should know about some new tax obligations that SARS decided to place on the seller. We have discussed this in the first article, please read this is you haven't yet.
The tax system in South Africa is a source based system; this means that, by definition, all income from a source in South Africa will be taxed in accordance with South African Tax Law, but it is not that simple.
My last article concentrated on the principle of “Crossing the Rubicon”. In this article, I will apply the concept in a property market perspective. In the property market, this tax principal is applicable when determining whether your property is a capital purchase; in a buy-to-let or a long-term purchase; and hence subject to only CGT upon sale.
To Understand “Capital Vs Revenue” purchases, one must first understand one basic principle. The “Fruit and Tree” principle is most important. The capital asset is the tree; it is kept in order to obtain the fruit and not sold in the short term.
If you have established yourself to be a non-resident, we now have to determine what income you will be taxed on. As I discussed in the previous article, all income which is from a South African Source, or deemed to be from a South African Source, will be taxed in accordance with the South African tax law.
Obviously, all income which is physically earned within South Africa will be a South African source. Here are some straight forward, common income sources:
Many property investors are buying property and finding themselves having to sell the property in a relatively short amount of time. The question that arises at this point is will they have to pay income tax on the sale or will they have to pay CGT?
The answer to this question falls under the terms “Crossing the Rubicon”. However, many investors do not understand this term nor how it works.
In this article we will try to demystify this term for better understanding.
What does “Crossing the Rubicon” mean; where does this term come from?
Historically, this concept or expression is used when a person gives a clear sign of change in intention; once you have crossed the point of no return; the point where your intention has been clearly shown through your actions.
Compounding factors over the last two years have effectively caused residential property markets to come to a stand still. Has the market bottomed out, will international bailouts be able to overcome the credit crunch? Everyone looking to 2009 for change. But will relief come?
Before delve into the issues, we would like to mention that some investors are quite happy with this situation. They've managed to double their portfolios in this market and plan on buying more. For these people the problem is just finding the right deals and getting financing. But for many investors and home owners looking to sell their properties, a breather in 2009 will be most welcome.
As banks have started tightening their lending criteria, many complaints have been heard from investors in the position to buy. After all, there is no point in having bargains everywhere when there is no finance to gear with. That is why we would like to remind people that putting capital aside for such times is crucial and essential. It's what separates you from the pack and allows you to do business as usual while everyone else bunkers down. All veteran investors know that without capital there is no investing, because there is nothing to invest.
So, will 2009 be the turnaround in property after 2 years of hardship?
In the previous
article, I spoke about the importance of cash flow and the
discounting thereof.
The next step is to
identify the relevant cash flows. Firstly; what is a relevant cash
flow?
A cash flow will be
relevant if it can be changed or altered by a future decision. For
example; if you choose to buy a building, you will make rental
income, but, you can also choose not to buy it and therefore not
receive rental income. An irrelevant cash flow cannot be altered by a
future decision. For example; if you own the building you will have
to pay rates and taxes whether you rent it out or not, you cannot
make the decision not to pay as long as you still own the building.
So, where to start?
Firstly, decide what your plan of action will be.
What asset are you
buying?
What cash
generating purpose will it serve?
How long do you
intend to keep it?
Then identify the
costs and the income flows related to each step. Things such as:
income, rates, general expenses in the production of income, selling
price at the end of its useful life and most importantly, the tax
implications. The tax implications must be analysed on the sale, the
income generated and the expenses. Most of these figures will have to
be estimated from current market data and capital growth potential of
the asset. Notice that we do not take into account interest or loan
re-payments; these are factors of our cost of finance and your
degree of affordability and are taken into account in our discount
rate.
The next step is to
identify when you will incur these costs. Some costs are incurred
yearly whereas others are only incurred once or twice during the life
of the asset.
It was brought to our attention that there are even more predictions about residential real estate going down for another 2 years or more.
Can this be true?
As with any prediction, it can be true as much as it can be wrong. But, in essence for real estate / property investors that have purchased correctly – this does not matter at all. Never did and probably never will.
Sure any investor can buy one or two wrong properties in their portfolio that don’t make much money, but one “sour lemon” has never been the “end of days” for any real estate investor.
Unless, of course there is the “but” again, and the “unless” again…. those are the only properties that the investor holds. Then this could be a big problem.
So, why in essence it doesn’t matter where the market goes?
Often, people who own investment, or even private properties, re-finance without calculating the cost involved or having a proper
understanding of the situation.
What is a re-finance agreement?
When you
first submit a request for a bond on a property, the bank assesses
the value of the property you wish to buy and grants you the bond at
the fair market value of that property. So, suppose you wish to buy a
house for one million, the bank will offer you one million, depending
on your affordability. They offer you this amount because, should you
default on your debt, they can repossess the property and sell it at
that fair value, thereby getting back their money. This represents
very little risk to the bank. However if the property market in the
area is in decline – then this would be very big risk to the bank
as the bond given won’t cover the selling price they can get
(should they need to repossess).
Often, the
value of property increases. Suppose that house is now worth 1.2
million. Should the bank repossess the property, they could probably
get 1.2 million for it when they sell it. Therefore, the bank offers
you a loan extension (an increase in your maximum loan) of 200,000.
You can therefore take out a further loan of 200,000, using the
property as collateral.
What
people must bear in mind is that this is not money in your pocket; it
is an increase in the loan amount of 200,000 which will have to be
re-paid over the lifetime of that bond. Most people believe that it
is money they simply receive and can therefore use to either lower
their bond or for personal use. The simple fact is that the value of
the asset which is up as collateral, namely the house, has increased
and the bank therefore extends you a possible increase in the loan
amount.
Finance
is always a worrying factor when starting any business.
Where will I
get it?
How much will it cost me?
Will this severely cut my potential
profits?
As you may have guessed, all these questions are
inter-linked. They all boil down to proper financial management. This
will result in lower finance costs, higher profits and most
importantly, proper investments.
Before
you dive into financial management, you must understand its most
important element; CASH FLOW.
As a property investor you will have to face various activities that sometimes can be challenging.
First you will have to find the deal that suits your needs and financial situation. Personal preference and circumstances are of high importance when buying an investment property. As we say on Property Investor Network, you should make your money when you buy, not when you sell. This is very important. The deal must be good for you at the time of purchase.
As we stress, over and over again, property investing is about calculating the numbers, not about the tiles, or the nice windows. Not even about the neighborhood. Though I am sure a lot of investors and particularity "emotional property investors" would love to argue the neighborhood subject.
Because of this, it stands to reason that one should buy as cheap as possible. Many investors ask what is cheap enough? Is R300,000 okay? Or maybe R500,000 or maybe one should go for the lowest prices in the worst places of R100,000.
Often I get emails about this Guru and that Guru. I get asked questions and often asked to give my opinion about other peoples systems and so called Gurus.
Here is the deal, everyone wants to know what is good and what they should get involved in, but that said there is a catch to all this and I will explain this right now in the hope of clarifying the questions about all the systems and gurus in real estate and the property investing market.
If you really want to get the best out of this post or clarification you should first come to suspend your thought of “Good” and “Bad” as definition.
I know, for some this may be too much to ask, but if you can do this for the next 5-minutes (which should be short enough to mange) you may understand much more from what you are reading.
Usually, people who ask about Gurus and systems are at the beginning of their property investing journey and the field looks very much like an endless jungle.
Some property traders and investors choose to buy property for the purpose of renovating and then selling.
This strategy can be used for both "selling for profits" and "renting for profits". In other words, there are 2 systems to renovating a property for profits.
Renovating properties is great way to generate income and some do this for a living. This type of deal is really a specific strategy and can be slightly speculative in nature if one is lacking the correct planning and fundamental considerations. In other words, you can "lose your shirt" doing this is, if you don’t know what you are doing.
Lets then look at the fundamentals and considerations that make property investors and renovators successful in this strategy.
Can’t Pay the Bond? This is how you can save your property and avoid repossession.
It is sad see that there are many property investors and home owners that can’t pay their bonds due to the recent interest rate increases. To add to the trauma, many have refinanced properties to the extent that getting a quick sale in the open market is close to impossible as there is no equity left to make the deal attractive to another investor.
This makes the situation very unpleasant and dangerous for the credit records of such persons. These incidents seem to leave the property investor or homeowner stuck, panicked and very emotional about the situation.
There are however a few solutions that come from the most unexpected place – the banks.
Many think it takes to be Donald Trump or Robert Kiyosaki to become successful in real estate investing. That is just not true.
Granted they are some of the most famous investors, but don’t think that others are not successful. Some are widely successful, they are just not famous…. and mind you, not everyone seeks fame after success.
Property investors need to optimize on their income to make up for the
shortfalls in their bond repayments due to so many interest rate increases.
Here are some expert tips that you can use depending on your
circumstances. Just a few things you can do right now that can help you
make and save money:
After all the venue workshops in 2007 and 2008 with more demand for the Investor Letting Workshop, it is finally online, you can learn from anywhere, anytime at your leisure.
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The term negative gearing is not very widely used in South Africa by property investors, in fact if you Google it you will find mostly Australian domain’s. Though the term is not widely used, we found it is extensively employed as an investing strategy and often with little knowledge of its’ meaning and consequences.
In this article, we will look at negative gearing and try to best explain what it is, and how negative gearing affects property investments. Negative gearing, generally speaking, is an investment strategy. However, just like with any other strategy, it can be good or extremely risky, if one doesn’t know what it entails.
By Dana Pretorius – Member of Property Investor Network
With the new increases in interest rates and the national credit control act, property investors must start to look at how to make more money from their current investment properties. Optimising the portfolio has never been more important than in the current economic climate. Property investments after all are supposed to make you money.
Many property investors will agree that cash flow is the secret to successful investing. Whether it is a property or business, the key to success is to have a strong grip on your cash flow situation. Interest rate increases, like the ones we have recently experienced, can significantly eat into the cash flow. Many people think that one needs to amass great sums of money to build wealth, but building a strong inflow of cash can also bring about financial freedom without having piles of cash.
In my last article I discussed where to find buy to letcash flow positive
properties, it stands to reason that now you want to know how to go
about finding them. So, lets get right to it.
As I mentioned in the first article, it takes great effort, but it is
by no means rocket science. If you are serious and committed to putting
in some effort, which must be consistent, you are likely to find many cash flow positive properties. You will also find, that buy to let properties in the residential market will get even easier to find with every increase in interest rates. Take
careful consideration of this, because if such properties where too easy to
find, property investor would be doing it and we wouldn’t need to discuss it at
all.
To continue from the first article, there is no particular province or
area for such properties, and hence finding strategies can be applied
anywhere.
In the last few years many developments have sprung and investors bough often more than one property. Though these could have been great investments some problems have been noticed with the fact that developments take time to develop and register at the deeds office.
For many economic reasons including the increases in interest rates, some investors found that their affordability has changed since the time they placed the offer to purchase and were granted the bond. They have overextended themselves, didn’t know at that time, and now don’t know what to do to save the situation.
If you are a new property investor, there are a couple of key issues you need to be aware of in order to help you avoid some costly mistakes that can take as much as two to three years to fix and could cost you thousands of rands.
This is actually two questions, often asked together. We will try to answer both, as these issues are very connected in more than one way. Hence the question should really be: Should one buy if not money is available to do so and if the answer is yes, then how would one go about buying.
This question has as many answers as there are individual circumstances. The truth is that many investors have purchased more property via re-financing money from existing equity. But this has to be taken into consideration with affordability as well, because re-financed money actually costs money. Banks do not lend money for free of course.
As a result of increases in interest rates and changes enforced by the New National Credit Act, many are predicting that the rental market is about to blossom for buy-to-let investors. The reasonsing for these predictions is logical, increased interest rates combined with lower bond qualifying amounts for property buyers will temporarily forced many people to rent. How true is this prediction?
As with everything in life, one can’t simply take a prediction at face value. There are many factors to consider before one can state, in this case, that increased interest rates and the NCA will usher in "glory days" for buy-to-let investors. This article looks at some of the consideration investors need to factor.
With everything that has been happening to the the South Africa property market in 2007, and a lot has happened other than the NCA and interest rate increases, there are two options a property investor can look at:
Pack up and go home, do not invest anymore and live in the depression mood or increase in interest rates, NCA and other worries, or
Take the opportunity to continue investing in a counter cyclical market.
If you don’t mind, we would like to discuss option 2, as option one is not very productive if you come to think of it.
Metering of electricity with secondary prepaid electricity meters is an
excellent way for property investors, landlords and letting agents to
avoid the risk of having to pay electricity utility bills, when tenants
don't pay.
However, feedback from the field shows that prepaid electricity meters
also have other benefits. Customers who have installed prepaid
electricity meters, in their rental units, are telling
PrepaidMeters.co.za that one of the interesting benefits of using
prepaid meters is that they are directly reducing their tenant
turnover.
It's at an interesting time in the market. The market has gone from Peach to all Strawberry's and Cream for property investors buying investment properties. The effects of the interest rate hikes, NCA, more interest rate hikes and the looming new rates and taxes bill, due to kick in next year, are coming together in close succession, creating a boom time for property investors with capital to spare. Now it is the time to buy investment properties.
Good investors have been holding something back during the boom years, circling the market in search of the weak and unsuspecting. As the dust of the race to buy clears, the carnage of the market is starting to show and finally investors can act on their counter cyclical instincts and come down to feast at the vulture restaurant.
Everyone knows that Estate Agents make their living from commission earned out of selling or letting immovable property. Yet, very few people understand the finer details surrounding commission. This lack of understanding often leads to disputes over commission between Estate Agency clients and between Estate Agents themselves. In this article we discuss the background to why an Estate Agent is due commission on sale, what an Estate Agent has to do in order to earn the commission and when an Estate Agent is not due commission.
Recently on PIN Forum there has been a discussion about “round trip financing” and the dangers related to this. If you wish to read the thread before you read this article it can be found here .
As a general summary, the problem for investors is when the start moving around money between people that are the same, or in other words connected persons and /or entities.
This falls under some heavy issues discussed in that thread about “round trip financing” with no commercial substance and much more. Section 80 of the income tax act no 58 of 1962 says in detail what a tax avoidance agreement is. The act deals with sections such as lack of commercial substance and round trip financing, both of which are clearly identifiable in this cases of connected persons.
In several of my articles I will be discussing special rules for connected persons. I therefore feel it is important to mention what a connected person is, for tax purposes.
The act separates connected persons in relation to individuals, companies, members of partnerships and trusts.
Many members of the Property Investor Network have expressed their concern with the newspaper headlines surrounding the NCA and also the fact that several banks seems to have suffered as a result.
To better understand the effect and bigger picture, let's look briefly at the situations in other leading property markets, such as the US and UK. This will help put a perspective on the South African market.
Most investors know that in South Africa, as opposed to other countries like the US, property investors cannot depreciate residential buildings. We all know that some changes have been made to allow depreciation on commercial buildings but residential buildings according to tax law doesn’t have many options. As you noticed, I said many options, there is though one option in the law that is somewhat constrictive, but which may still be a viable option for buy to let investors. That statement needs a minor correction, in this article we will be referring to a new term “develop-to-let”. Hang on a bit here and we will explain everything.
We found that there is an allowance in the tax law that enables property investors to depreciate a building and before we wrote this article we went out to investigate the information and give you some examples of how you can depreciate a residential building and in what conditions. So here goes…
The estate agent community has expressed extensive concern over the NCA. Is the picture really that of gloom and doom? Just as with other articles this month, the answer is yes or no, depending on your perspective. To help you decide which, this article takes a broader view of the picture so that we all can hopefully make more sense of the situation.
We recently published an article focused on the negative effects the NCA is having on the economy as a whole. However, when we look at the estate agency industry we must realize that it has many sub-sectors. For the purpose of this article, we will only discuss residential, as we believe that this sector is currently the greatest pressure.
So, is the doom and gloom projection and speculation for estate agents in the residential market due to the NCA and how much does the NCA impact on such a possible outcome?
It has been a whole month and a half since the NCA has taken its’ full force and affect and the horror stories are starting to pour in.
I think that the whole picture of the NCA is not fully clear yet, but the effects have started to take shape.
Some comments, stories and situations have brought to the sad and hopefully wrong conclusion that the NCA has the full capability to bring the country down to its’ knees. Lets hope we are totally wrong.
This article is a short comparison for two bank products. Many people asked what is the difference between ABSA buy to let offering and Nedbank. We asked Donnie Claassen our resident Financing Expert to help us out on this one.
You can contact Donnie here with any questions or comments on this article if you need clarifications.
Before starting it is important to remember that every bank creating a product has certain criteria attached to it. As you see everywhere “Terms and Conditions Apply”, this also applies to bond products.
Interest rates have now gone up 450 basis points and a further hike this year cannot be excluded from planning. Along with this, fuel, food and energy prices are set to increase. Most of this woe is outside the control of the South African Reserve Bank, but nonetheless impacts heavily on an already straining economy.
Things are looking pretty rosey as the perfect storm begins to brew. Perfect for Property Investors.
In this market properties are “dumped” on the market in a last minute desperate attempt by owners trying to avoid repossession. Everyone tightens their belts and their budgets, business included. Layoffs follow, costs go up and inflation is the word on everyones lips.
The long speculated market downturn is undeniably here. No need to speculate, it's on the streets and creating havoc. The stage is set for the perfect storm.
Once in a while like in every industry we need to look into the future to plan our marketing and continued growth. The Real Estate agents industry should do that now. I wrote a while ago that real estate agents should start looking into the future while taking new communications and networking methods into account.
In every industry once in a while there are changes that have major future affect on how we do business. I remember the days when some people refused to carry a cell phone. Look today where we are. Even a 7 year old child carries and owns a cell phone. People are even becoming phobic without their cell phones, like it is their life line. What did we ever do before cell phones?
I don’t know if this is good or bad nor do I care to criticize, but what is important is that I have noticed a change in the way people are marketing property to one another; a change that has the potential to be as significant as the cell phones, if not even more. Because it connects people instantly and only people that wish to be connected to each other in this communication medium, much like the cell phones.
Yes, I am talking about the social networks and the move into social networking in the property space. When I speak to agents about social networking, they look at me in with a funny look, either I am mad, or they have no clue what I am talking about. This makes me seriously wonder.
Today social networking and social media is growing by leaps and bounds, monthly, not yearly. Take into consideration that Facebook since 2004 has acquired some 64 million users and I also heard a report that some 250,000 users are joining monthly. That is just beyond amazing.
But what does this have to do with real estate agents, property and Private Property?
As you all know by know Philip Viviers is one of the Experts on Property Investor Network and we just wanted to give you his summary view the 2008 Budget as he wrote it:
This is one of the most frequently asked questions we got througout
this year (2007) from property investors in the residential buy to let market. It is very interesting to note, that before the
increase in interest rates, this question was not often asked. It was
like property investors either took it for granted that cash flow positive
properties just did not exist, or that the difference between the bond
repayment and rental did not really bother them based on handsome
equity growth.
As interest rates started increasing, so did the frequency at which the
question, “Are there any cash flow positive properties?” got asked.
