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Deciding where to invest your hard-earned cash can be challenging, especially when considering factors such as costs and taxes.
In this article, we compare the outcomes of a 10-year investment in an investment property, a fixed deposit at the bank, or a diversified investment portfolio.
1. Investment Property
We have calculated the estimated investment return if you purchased a R2million flat at the start of 2014 and sold the property 10 years later at end 2023, while renting the property out the entire time. We have used industry data to facilitate these calculations.
Growth of Property Value less CGT:
| Purchase Price | R 2,000,000 | |
| Transfer Duty & Costs | R 82,952 | Transfer duty, transfer costs, deeds office fees |
| TOTAL COST OF PURCHASE | R 2,082,952 | |
| Growth in Property Value | R 1,196,265 | Average residential property growth 2014 to 2023 = 4.8% p.a. (Source: FNB, Global Property Guide) |
| less Capital Gains Tax on property sale | R -143,552 | Assumed tax rate of 30% multiplied by 40% CGT inclusion rate on R1,196,265 capital gain |
| FINAL PROPERTY PROCEEDS (AFTER CGT) | R 3,052,713 |
Rental Income and Costs:
| Rental Income | R 2,267,920 | Average SA 2 bedroom rental apartment property yield = 9.1% (Source: Global Property Guide) |
| less Income Tax on Rental Income | R -680,376 | Assumed tax rate of 30% |
| less Maintenance | R -120,000 | Assumed maintenance costs of R10,000 per year |
| less Levies | R -448,599 | Assumed levies of R1,500 per R1m property value |
| less Rates and Taxes | R -276,337 | Assumed rates and taxes of R924 per R1m (after R200k allowance) |
| RENTAL INCOME LESS COSTS | R 742,607 |
Investment Property Outcome:
Using an initial investment value of R2,082,952 and an end investment value of R3,795,320 (net sale proceeds plus net rental income) after 10 years, this equates to a net investment return of 6.2% per annum. This is 1% per annum higher than average SA inflation over the past 10 years of 5.2%.
2. Bank Fixed Deposit
We have also calculated the estimated return if you invested R2million into a 5 year fixed deposit at the start of 2014, and reinvested again at the start of 2019, with the deposit maturing at the end of 2023.
| INITIAL INVESTMENT VALUE | R 2,000,000 | |
| Interest Income Earned | R 2,734,727 | Average 5 year fixed deposit effective rate of ±9.0% p.a. |
| less Income Tax on Interest Income | R -820,418 | Assumed tax rate of 30% |
| END INVESTMENT VALUE | R 3,914,309 |
Fixed Deposit Outcome:
Using an initial investment value of R2,000,000 and an end investment value of R3,914,309 (net sale proceeds less tax paid during investment) after 10 years, this equates to a net investment return of 7.0% per annum. This is 1.8% per annum higher than average SA inflation over the past 10 years of 5.2%.
3. Long-Term Diversified Investment
Finally, we have calculated the estimated net return you would have earned if you had invested in a diversified investment portfolio such as a unit trust portfolio, wrapper or endowment.
| INITIAL INVESTMENT VALUE | R 2,000,000 | |
| Investment Growth | R 3,140,518 | Portfolio growth of 9.9% p.a. assuming 75% in a Balanced Fund and 25% in the MSCI World Index |
| less Income Tax on Interest Income | R -141,323 | Assumed tax rate of 30% |
| less Capital Gains Tax | R -320,333 | Assumed tax rate of 30% multiplied by 40% CGT inclusion rate on R2,669,440 capital gain |
| END INVESTMENT VALUE | R 4,678,862 |
Using an initial investment value of R2,000,000 and an end investment value of R4,678,862 (portfolio proceeds less tax payable) after 10 years, this equates to a net investment return of 8.9% per annum. This is 3.7% per annum higher than average SA inflation over the past 10 years of 5.2%.
Conclusion:
The comparison between the three selected investment options illustrates the importance of considering all factors when making investment decisions and not just focusing on the gross return or income you can receive. Expenses such as tax, costs and fees will have a large impact on your actual net investment return over the long-term and can result in a difference in return of 2.7% per annum, or effectively a gross total return of 25%
Please contact us at info@investonline.co.za or call 021-001 2323 to arrange an introductory meeting with one of our Client Portfolio Managers.
