Saving towards a 5-year goal

A reader wants advice on where to save towards buying a property.

coin into piggy bank“My mother, sister and myself would like to open a savings or investment plan whereby together we would contribute R900 monthly and increasing it by R300 yearly or bi-annually for five years. We want to use it to buy property in five years’ time and rent it out. My mom will be retiring in five years’ time and she wants to use part of her pay-out and our savings to buy property. This way we would avoid taking out a loan. Which savings plan we can make use of to invest our money and are there any other tips or ideas relating to our goal?” writes Kholofelo

Maya replies: It is great that you and your family have a goal to create wealth and are committed to it.  Working together for a common goal will provide motivation and help you stay on track.

Investing

In terms of investing the funds, it is important that you invest into a growth investment that will keep up with inflation as property prices will increase over the next five years.

You could consider a unit trust that invests across a range of assets including equity, property and offshore. Many fund managers believe that offshore equities will perform better than South African equities over the next few years so make sure you have some exposure to those.

Based on your contributions, and if the investment returns 12% a year, then you should have around R115 000 saved within five years. Remember that growth assets such as equities (shares) can rise and fall in value in the short term but over five years they should outperform inflation. By investing monthly you also limit your risks in terms of share price movements.

Tax implications

Rental from property can be a very effective income generator in retirement if managed correctly. In terms of using your mother’s pension pay-out, make sure you maximise her tax benefits by only using the tax-free portion of her pension pay-out for the property investment, which is currently R315 000.

Also consider in whose name you will register the property as this person would be liable for the tax payable on the rental income. Be careful of registering the property in a trust as these have become expensive vehicles and are no longer as tax efficient as they used to be.

Landlord issues

Do your homework and understand what type of property and which area is most suitable as an investment property. Find out about rental yields (rent received vs what you paid for the property) in the area and what you need to know as a landlord especially in terms of contracts, your rights, as well as landlord insurance to protect against non-paying tenants. Make sure you budget correctly for other costs such as levies and maintenance.

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