Assessing Investment Options

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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.

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