Hi Money makers,
It’s your favorite content creator, TalkingCents.
In today’s article, I’m going to be talking about property and the associated costs one can expect when buying.
Misconceptions
Real estate involves more than simply making a one-time payment and considering the process complete. It extends beyond just putting down a deposit.
Rushing into a property purchase because of the belief of optimal capital returns or the idea of it being a foolproof source of "passive income" is not entirely accurate. While significant gains are possible, it's essential to understand the insights I'll be providing in the forthcoming articles throughout the year
It's crucial to understand the commitment you're making when buying a property and assess whether it financially aligns with your interests, long term plans, and your future financial capabilities. Making an ill-informed purchase could result in a costly lesson, hence my aim is to help you avoid these mistakes.
Before we start,
I’m going to ask two things from you going forward, which will serve as my motivation to keep putting out content that helps you.
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Starting line
When purchasing a potential property, it’s important to take your time when making decisions, especially if your estate agent is urging you not to miss out on what seems like a great deal. Remember, their job is to sell to you, but your responsibility is to walk away if the deal doesn't suit your needs or doesn’t make financial cents.
There are normally two options for you when buying property. You can go the route of buying a (1) sectional title or (2) freehold property.
Sectional Title
It is the separate ownership of a unit within a complex. You can think of it as a group-owned development. You are one of the many owners that are involved in decision-making and ownership.
You only own:
A section
The structure
Undivided share of common property
The common property is the part of land in the scheme that is owned jointly by all the owners, in undivided shares.
Examples include:
Gyms & Pools
Play & Entertainment areas
Passages & Stairways
In sectional title complexes you and the other sectional title homeowners make joint decisions as a committee. That means before you can make any changes in these kind of structures, you need the consent from the trustees or the homeowners.
A body corporate is the name given to all the owners of the units within the scheme, they are the ones that manage the complex. Whereas, trustees are those responsible for managing the body corporate’s funds.
My opinion on sectional titles
From personal experience, I would outright avoid sectional titles. Mainly because you give up autonomy.
The financial health of a complex can also be a concern, with some unit owners possibly not paying their levies or falling behind in payments. This can result in the complex spending more than it brings in, causing the complex’s accounts, including municipal accounts, to fall into arrears. Such circumstances could impact valuations due to restricted maintenance work, potentially affecting your ability to sell in the future.
While there are both advantages and disadvantages to sectional titles, from my perspective, I will opt to avoid them in the future unless the return on investment (ROI) is fantastic, choosing instead to go with a freehold.
Freehold
Freehold is in contrast to sectional titles; here, you own the entire property, and it does not form part of any larger community, thereby freeing you from the restrictions you would otherwise have with a sectional title. Hence free from hold.
You own it all
Land
Buildings
Border walls, etc.
Within freehold structures, the owner independently manages and oversees the property without requiring consent from others. Consequently, freeholds typically command higher prices compared to sectional titles, making it somewhat more challenging to enter the property market.
Advantages and Disadvantages
Choosing between freehold and sectional title properties is a pivotal decision in real estate. Freehold offers autonomy but comes at a higher cost, while sectional titles provide a communal setting and involves shared responsibilities.
Each option comes with its distinct set of advantages and disadvantages, influencing the way individuals experience homeownership.
Sectional Title Advantages
Increase security and community awareness
Community living
Upkeep is not only your concern
Levies cover building insurance ( not always )
Common facilities, which are generally good.
Freehold Advantages
Full autonomy, decision making is yours
Pets allowed, however, some sectional titles may allow this too
Own everything, responsibility is all yours
There is increased privacy compared to community living
Properties tend to be larger and have more yard space.
Sectional Title Disadvantages
As an owner, there will be rules and regulations to abide by
Lack of autonomy and control exists
Because of multiple owners, you may not be allowed to have pets
Depending on the size, you may end up having noisy neighbors.
Freehold Disadvantages
The price of property tends to be higher
The responsibility of upkeep falls entirely on your shoulders
Freehold properties isolate you, which tends to be a security risk
Neighbors may not maintain their property, bringing down the value of yours.
Bottom line
The choice between sectional title and freehold properties boils down to individual preferences and needs. This underscores that the preferences among property buyers ultimately creates the market, creating opportunities in both sectional titles and freehold properties.
As individual buyers with distinct priorities, it's crucial not to succumb to external pressures when making a decision to buy. Taking the time to carefully weigh the advantages and disadvantages ensures a better outcome.
The key takeaway message is clear – rushing into property is unwise. Patience plays a pivotal role in this domain, and dedicating time to a comprehensive evaluation of the pros and cons ensures a well-informed decision.
Disclaimer:
I've chosen to place a paywall on the majority of my property content due to the substantial time and effort I invest in researching and sharing knowledge gained through practical experience.
From my perspective, a modest fee to gain access to premium property information in South Africa can be viewed as an investment in your education.
If you're contemplating purchasing property, an annual subscription is priced lower than the potential cost of regret and/or the consequences of making an uninformed decision.
The True Costs of Property Ownership
Opening the door to the journey of property ownership is an exciting prospect, but above the surface lies a hidden attic of costs that extend beyond the upfront purchase price.
Outside the spotlight of the purchase itself, I'll shine a light on the often overlooked fees, such as taxes, insurance, and various expenses that can significantly impact your overall investment.
Hidden Knowns
When you purchase a property, you need to pay transfer fees to cover the costs of transferring the property to your name. This means that the fee you pay will go to the conveyancing attorney to handle this process of transferring ownership to you.
Transfer fees are NOT the same as a transfer duty.
The former (transfer fees) are paid to the conveyancer, whereas the latter (transfer duty) is payable to SARS.
Think of the one as a service fee and the other as taxation.
Transfer fees are calculated on the purchase price of the property or the capital amount on the bond, and the fees can range from anywhere between R18 000 to R25 000.
For reference sake, I paid R18,986.50 in total on a R680,000.00 property, of which R2,476.50 was VAT (tax).
When you start to break down the real costs of property ownership it becomes clear that future return is being eaten away by taxation, both during the initial purchasing stage and during the lifetime utility of the asset.
I like to refer to this as “expropriation through taxation”
Nonetheless, it doesn’t necessarily mean all property purchases are bad because there are unquantifiable costs to the utility of the asset, which I will explore and highlight for you in future property articles.
Transfer Duty
As mentioned, the transfer duty is a fee levied by SARS, it is on the sale of all properties, however, it is only applicable if the property is over R1.1 million, which usually adjusts upward for inflation each year.
If the upward adjustment didn’t occur, it would potentially increase SARS revenue. This is because lower priced properties below the R1.1 million threshold would inevitably rise due to house price inflation. Consequently, pushing properties that were initially exempt from tax into a taxable bracket, transforming them into a new source of revenue for SARS.
Watch for the upcoming 2024-2025 transfer duty rates, but for now, here are the current 2023-2024 rates:
Prior to the 2023 - 2024 adjustment, SARS left the transfer duty rates at a threshold of R1 million for two consecutive years. (2021 - 2023)
This speaks to my point in the previous paragraph of SARS not adjusting the threshold upwards to account for house price inflation. We can see this tactic was used in the prior years to squeeze out additional revenue for SARS.
It will be interesting to see what they do this year, I expect more of the same slight of hand maneuvering because these methods of taxation are more subtle than outright taxing you.
“This is why inflation is a form of taxation”
It is these illusions that I like to refer to as the true costs of property ownership. The real hidden costs aren’t in the upfront nominal amounts you pay, but rather the silent subtle asphyxiation of taxation.
Bond Registration Fees
It goes without saying, but I’ll mention it nonetheless. If you are taking out a bond to purchase the property, you will encounter bond registration fees to register the bond with the deeds office.
These costs are determined by the size of the loan. (The bigger the loan, the higher the amount). The bond registration fee for a R680,000.00 property with a bond amount of R600,000.00 costed me R16,962.50.
However,
I managed to negotiate a 50% reduction because I promised to keep my home-loan with the same bank I banked with. This is a negotiation tactic that many neglect, remember banks do want your business too.
From there, this also helped me negotiate a rate of prime less 1.12%.
All said and done, I ended up paying R8 481.25 (inclusive of VAT) for my bond registration. Notice that VAT is charged again in this transaction too.
Attorney Fees
Many future and current property buyers get overwhelmed and confused with attorney costs because there are two sets of attorneys in the process of taking ownership of your property.
The conveyancer is appointed by the seller and handles the transfer to you.
Bond registration Attorneys are appointed by the bank to handle bond registration fees.
National Credit Act Initiation (NCA)
In short, the initiation fee is a charge that lenders impose when a credit agreement is initiated or when a consumer applies for credit and accepts it. It covers the administrative costs associated with processing the credit application.
In the table above, you can see the NCA initiation fee came to R6,037.50
When you finalize the purchase of your property, your outstanding bond amount with your bank will increase by the NCA initiation fee. It is recommended to anticipate this additional fee and settle it promptly instead of adding it to your total outstanding debt.
The reason I say to settle the NCA initiation fee upfront instead of adding it to your principal debt is because from a court filing involving Micro Finance South Africa and the Banking Association of South Africa a loophole was created in the National Credit Act (NCA), permitting the initiation fee to be added to the principal debt and allowing it to accrue interest.
Building Insurance
Property owners are required to take out insurance to cover the structure of the building and any common areas. Most of our financial institutions won’t give you a home loan unless you have building insurance.
Sectional titles properties usually build this into the levies.
Rates and Taxes (Freehold property)
These rates are calculated against the value of your property and are paid to the municipality for basic services such as:
• Sewage
• Refuse
• Road maintenance
• Street lights, etc.
Rates and Taxes form part of your monthly expense and reduce your cashflow in the short term for a “larger” pay off in capital gains in the longer term.
Monthly Levies (Sectional title)
These are fees that are paid to the body corporate to cover the maintenance and repair of common areas:
• Gardens
• Pools
• Security
• Insurance Costs, these costs are dependent on complex running costs and the square meterage.
Additional Costs
There are even more costs you can expect to fork out when buying property.
Registering utilities in your name
Additional security
Life insurance
Moving costs
Repairs and maintenance
Rising interest rates
Monthly home loan account fee
Closing Remarks
Property owners and future property owners need to ensure they have a comprehensive understanding of the true financial landscape they are entering into.
It is always a good idea to budget very carefully and be aware of all the costs associated with owning a property before jumping in. This is one of the biggest financial decisions you’ll ever make, and buying wrong could set you back enormously in the years to come.
Watch out for part 2 of this article, where I tie all the costs together and teach you what to look out for.
Until then, stay safe.
Dave :)