“My primary residence is fully paid off and I recently purchased a second property which I would like to pay off in the next 5 years. I have an extra R100 000 in a money market account, should I put that into the rental property plus an extra R2000 per month and pay off the bond in three years? Or would it be better to invest the money in a good unit trust for 5 years and then to purchase a third property with about 40% cash deposit?” writes Neville who is a 41 year old teacher who grew up in a very disadvantaged area but managed to save enough to buy his first property for cash.

Maya replies: I want to applaud you for showing readers that one’s income is not what dictates your wealth, but how you spend or save it. I receive many, many distressed emails from teachers in debt, yet here is an example of someone who on a teacher’s salary is in a position to build wealth.

In terms of your question a couple of points come to mind:

Portfolio diversification:

You need to look at your total investment portfolio. You have an emergency fund and you have taken care of your retirement which is good. However in terms of your discretionary savings this strategy would mean you only had exposure to property which does increase the risk as you are exposed to only one asset class.

Property has the advantage of having someone else pay for it through rental, but it is also a very illiquid asset. You may want to build up wealth in something like equities that provides more liquidity in case you want to use your savings for a life changing event.

What many people do not realise is that over time equities provide a very tax efficient income for retirement – more so than property and it does not come with maintenance, rates and tenants!

So may want to consider building up an equity portfolio either through unit trusts or through a stock broker to diversify your exposure across various asset classes rather than buy a third property.

It would make sense to take the R100 000 and pay that into the house as your mortgage rate would be around 9% and you are certainly not earning that on your money market.Once your property is paid off you could use that income to start an equity portfolio.

Taxation

In terms of taxation, once you have paid off your second home that rental income is fully taxable less running costs including levies and rates etc.

If you decide to rather buy a third property you could draw down on the mortgage from your second home to fund a deposit for a third property. This way you are maximising your tax efficiency across the two properties.

The risk here is that now you owe money on two properties. This may also impact on your ability to obtain a loan for the third property. Hence tax should not drive your over-riding decision.

Unit trust vs mortgage

If you are resolute on buying a third property, your question on whether to put your extra funds into your second property or a unit trust is a difficult one as it really depends on what the markets are going to do over the next few years.

If we continue to see growth in the equity markets and they grow at around 12%, then you are better off saving in a unit trust than your property (assuming a 9% mortgage rate). But you would also have to be confident that the equity market would be still rising in five years’ time when you want to buy a further property.

You could save the money in a lower risk fund but that would reduce your chances of beating 9%. On balance paying off the property may be the best strategy – especially if interest rates do start to climb.

If your property is paid off in three years then you have two years to build up a deposit with that rental income and it puts you on the same time frame as if you saved the money in a unit trust.