RAISING PROPERTY DEVELOPMENT FUNDS

Isn't land ownership absolutely amazing? Does it give meaning without finances needed for development? Our reader owns a plot of land and needs funds to develop it. Can we put our heads together to come up with non-traditional ways of raising property development funds in South Africa? We may just bring a solution to the email I received from the land owner below:

Raising Property Development Funds - Photo taken by me in Beacon bay, EL.

Hey Mbini
Thank you for creating this page for some of us to learn.

I bought a plot of land that I would like to develop. However, I would like to develop under my Pty (Ltd). Could you please advise on any developers that I could approach for funding.

Kind regards,

Well done on your acquisition sir. It is always complex giving an opinion on someone's situation, when you do not have a full picture of their personal and financial background. What I know is that raising property development funds is not easy for any new property investor. The requirements are getting steeper and steeper with time. Banks also charge exorbitant interest rates to new players in the real estate sector. Your idea of approaching accomplished developers makes a lot of sense. Since I don't know your location and developers in your area, I am not well positioned to give a meaningful opinion. From experience, I find smaller developers more approachable as they themselves are likely to be searching for partners. Bigger investors are mostly looking for and working on mega deals.

Traditional Banks and other Financial InstitutionsFor those who are also interested to get into obtaining funding for their own property development projects, work hard at making that dream happen. There is a traditional route of raising funds for a real estate development, which works better when you have your own equity or assets as collateral. Borrowing from the banks and other financial institutions would be great. Being able to secure the funds from these financial institutions is a sign that the project is economically viable.

Property Developers and Construction Companies
In this reader's case however, he/she wants to take a different route of partnering with the established developers. For an experienced developer to have an interest in one's project, it has to be a project that that particular developer cannot easily get. There are always developers that are also into partnerships because of their size or to share the risks. Those can be potential investors in one's first project. Looking at the construction companies for partnerships should never be ruled out. A lot of construction companies have resources but do not have land.

Private Investors
Another way of raising property development funds is through private investors. The concept of private lending and investors is unfortunately not a popularised one in South Africa. If a project promises high returns, investors that never even thought of on investing in property before may show interest. A land owner's homework includes working out the rate of returns before they approach prospective investors. The investors may partner on the project through profit sharing or grant a loan with an interest that is slightly higher than the traditional banks' interest rates.

In the case where one gives shares to the private investor, the land and work that has been done, has to be valued and contributed as the land owner's equity. The investor may then contribute the funds to develop the land. This is where it becomes tricky. Land owners usually expect to get a bigger share than land value. And in most cases, they expect their land to be worth more than it actually is. An entrepreneur has to work on looking at transactions objectively. Another tricky part of this approach is that, as a share investor, one has a responsibility to monitor the progress of the project. Unlike a private lender, a share investor will be an active part of the workings of the development to look after their investment.

These kinds of private investor partnerships have a potential to be complex, especially when roles are not clearly set. One needs to have well drawn legal contracts to protect themselves and their companies.  The same goes if the investor is a friend or a family member. A gentlemen's agreement will not cut is as it is legally non-binding.

Note:
 Feel free to leave a comment below to help the fellow investor out. And if you find this post helpful, be so kind to share it on your Facebook wall or other social networks using one of the buttons below.

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DIVERSIFYING A PORTFOLIO

Readers of this blog are amazing. I am so privileged to get to know and interact with such inspirational individuals. Below is an email I received last week from a great young professional who is fast approaching his financial independence/ FREEDOM. I do not really have much to say to this reader other than to emphasise the importance of diversifying a portfolio. Learning to do this and occasionally re-balancing your portfolio could be the two activities that yield the highest returns in your efforts to build your wealth. I cannot think of any other point to raise, as this young man/ lady is intelligent enough to do their own research themselves.

Good morning

Thank you for having such an amazing blog. I really love it!

I am a 25 year old and started my first permanent job in October 2014. I can afford to save R5000 of my salary each month. However I am saving R3500 towards a car deposit and would like to invest the balance of R1500 each month. In addition I have a lump sum of R15 000 which I can add to my investment.

I have read your article about "investing in your 20's" and "ETFs". The ETFs got me interested.

Could you please advise on the following:
- Should I invest the lump sum and the monthly savings in ETFs or
- Should I invest the monthly savings in some other investment fund
- Also what ETFs should I choose or how do I go about choosing an ETF and which investment companies would you recommend.

Looking forward to your response.

Kind regards

Firstly, I have to salute and thank you for your email sir/madam. Keep moving. The sacrifices you are making will bear fruits later in your life. Equip yourself with knowledge that will enable you to take well informed decisions. I know the temptation to put all your money in an investment that is promising the highest returns ever. We all want maximum returns on our investments but using the highest growth as an only investment picking strategy can be detrimental to our wealth; in the event of an economic disaster. Diversification acts as a preventative measure for such dreadful events. Having all eggs in one basket could mean getting the highest returns possible or losing everything.

Diversification of asset classes like stocks, bonds, currencies, etc and diversification within each asset class like individual stocks or ETFs in various sectors (financials, resources, telecommunications, property, etc) are equally important. To clarify this point; buying into Nedbank, FNB, Capital Bank, Standard Bank and ABSA or MTN and Vodacom is not good enough as it is investing within the same industry. You cannot be invested in a single industry and consider yourself well diversified. Some economic tragedies sweep across the whole industry, like the most countries' financial sector in the recession of 2008. No one industry is immune to economic disasters. This is what makes diversifying a portfolio one of the most important steps in reducing the risk your wealth is exposed to.

Let us use the most popular sector classification system by the global industry classification standard (GICS) just to shed some light on how one can diversify their portfolio within sectors and industries. They grouped industries (sub-sectors) into 10 sectors.

Sectors and Industries
1. Energy
2. Materials   
3. Industrials 

• Capital Goods
• Commercial & Professional Services
• Transportation

4. Consumer Discretionary 

• Automobiles and Components
• Consumer Durables & Apparel
• Consumer Services
• Media
• Retailing

5. Consumer Staples 

• Food and Staples Retailing
• Food, Beverage and Tobacco
• Household & Personal Products

6. Health Care 

• Health Care Equipment and Services
• Pharmaceuticals, Biotechnology & Life Sciences

7. Financials 

• Banks
• Diversified Financials
• Insurance
• Real Estate

8. Information Technology 

• Software and Services
• Technology Hardware and Equipment
• Semiconductors and Semiconductor Equipment

9. Telecommunication Services 
10. Utilities

Not to confuse myself and the rest of us, the point that should be driven home is that one needs to have a clear plan of action that is informed by a deeper understanding of how the sectors of the economy work.  Knowing your sector groupings and their historic performance can help you take an informed decision when investing, especially in Exchange Traded Funds (ETFs) and individual stocks. You may now go into each available ETF sector like Financials and compare their 3, 5 and 10 year performance to get the understanding of how they grow. Don't leave out the other groupings of companies that are not sector specific like high dividend stocks.

Whilst conducting research, we often discover a sector which outperforms the rest and we are tempted to blindly put our lump sum in that one sector. Worse actually, we find one company doing extremely well and we put all our wealth in it. ETFs on the other hand are generally diversified per sector, performance (Top40s) or dividend payout. Whilst throwing money at them with no care is not advisable, they have a reduced amount of risk because they each are a basket of industries or companies. One can choose Industrials ETfs (with transportation, autos, etc) or financials ETFs (with banks, insurance companies, etc) for instance. Diversifying across all sectors could mean choosing your top performers, high dividend paying, international stocks per country, international stocks per continent, etc. Build a diversified portfolio, not necessarily including all sectors. You need to keep it low cost too. We will briefly touch on the dangers of being over diversified later in this post.

The young investor here is young enough to stomach quite a bit of risk compared to some of us...WINK. I would think dividing the R1500 into two or three ETFs may work. Just do your research and take a well informed decision. A response to any email here is never suitable for all of us. One's age can be a determining factor. If our investor was older I would also highlight investing in the bonds. That laddered approach is great for any kind of periodical investing. Staying informed on financial and economic news is mandatory. No investment is completely passive.

Dangers of Being Over-diversified
It is possible to be more diversified than it is financially healthy. Remember that each of your trading has some fees and some even commissions. An over-diversified portfolio can be costly. It also reduces the potential returns because you may end with too many under-performing stocks and assets too. One does not need stocks in all sectors and industries nor all types of ETFs. You may need to prioritise a few sectors according to your research.

Note:
I have been away for a long weekend and swamped with work on my return. I try to have a post most weekdays. When you do not see me, know that I am dealing with matters beyond my control.
Feel free to leave a comment below to help the fellow investor out. And if you find this post helpful, be so kind to share it on your Facebook wall or other social networks using one of the buttons below.

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STARTING IN PROPERTY INVESTING

A question related to starting in property investing is probably the most common type of question that gets mailed to me here at Safe Investing South Africa. A lot of aspiring investors are fascinated by real estate. Which does not come as a surprise to me. What drew me to this type of investment is the power of leverage. I find that to be quite enabling for investors with jobs and stable sources of income. Today we look at a property investing reader's question:

"Property Investment
I would like to enter the property investment market. I only have R70,000 which I would like to use as start up capital. I am not sure how flipping for profit works but would like to learn. Secondly I am interested in blogging and not sure how to start. Your assistance will be highly appreciated."

Photos of New Developments that I take: Starting in Property Investing

 Let us start by unpacking "Leverage" or "Gearing":
This simply refers to the ratio of one's debt to their equity.  One invests their own equity (say R70,000 in our case) to borrows some more cash (debt) with the hope of making profits that are higher than the price of that debt (interest). To simplify it further with an optimistic property flipping example:

• You get an all inclusive homeloan of R450,000 (debt) and invest R50,000 as the deposit (equity),
• You use the R20,000 to renovate the place in a short space of time,
•  You then put the property back on the market at R700,000 (I said optimistic OK),

What happened here is that you invested R50,000 to make R200,000 (total profit). This is 300% profit on your investment. R200,000 is a profit from what you spent, not from the cost of the project. You may now pay back the R450,000 holemoan and go for a bigger project or multiple projects. This is how investors use lenders' money to make money for themselves. If you maintain a good credit record, you stand chances of getting very cheap debt (low interest rates).

Important to Remember:

1. One needs to be having income or financial support because a property can take a little while to sell;
2. The right time to make returns is when one buys. Buying a property which is undervalued due to non-structural challenges like broken tiles and cracked plaster or chipped paint is always wise;
3. Nothing beats the location of the property. It has to be in an active market.

Let us now be more realistic as we look at your R70,000. This is how I would approach it:
1. I would start in a Low Cost Area
It is tempting to want to look at the Metropolitan cities but the small towns and townships are offering huge opportunities at the moment. One should always look at the fast growing areas for opportunities. Not to forget to look at the rental demand before one even starts. One mistake we usually make is to look at the rental prices in one area and compare them with rental prices at a different area and draw uninformed conclusions. We should be basing our real estate investment decision on rental yields or returns.

In Gauteng suburbs for instance you will likely invest R500,000 or more to collect R5,000 gross monthly rental and a negative net income. In a tiny town similar to where I will be developing a few flats, you buy a smaller house within a larger erf (land), re-develop the land and get a few tenants. You are most likely to collect way more net income for a similar amount invested.

Low cost areas are definitely not for flipping because of the low property prices. They are for rental income sort of investors. Also important to note is that one develops at a slower pace in smaller South African towns. It is a painfully slow process to get things done. You will need to exercise your patience especially when the municipality is involved. Getting plans for existing structures, and information on restrictions and servitudes on the land is my biggest challenge. When you have gone past those humps, these kinds of investments seem lucrative and cost-effective.

2. Leverage
One could also use the R70,000 as a deposit in a high growth and high rental demand area. You would be better off with a property way below R600,000 as they are exempted from transfer duties.  This option requires one to have monthly income to repay the loan. If you have bought right, you would be in the position to get a positive cashflow when you rent the property out. Or to resell the property at a profit if you are flipping (see the Leverage/ Gearing passage above).
Flipping with a mortgage and on a tight budget is not easy.

3. Form Partnerships
 I would try and get a partner to boost my capital as I am starting in property investing. Choosing this option means that partners should set clear roles and responsibilities.

4. Real Estate Investment Trusts (REITs)

"A real estate investment trust (REIT) is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands." Investopedia

One can invest in property through buying REIT shares in the open market. These may also be in the form of real estate Exchange Traded Funds (ETFs). This way you are investing in huge commercial property without the hard work.

When it comes to blogging, it is not as difficult as people think. Most people use wordpress and some, like myself use blogger. Both are free blogging platforms. I will have to do a separate blog post on this one.

Welcome to new readers. I started this journey alone and am encouraged to see interaction through emails that you guys send through the contact me form.

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INVESTING R100 OR R200

I get emails everyday but I find it particularly impressive when students and new entrants in the job market think of saving or investing. The amount of money invested is not as important as the early start and consistency thereof. Today we have a new graduate who gets an allowance from his/ her parents or guardian. The young investors are so close to my heart because they are the ones who have the best shot at shortening the journey to wealth. Our graduate here wants to invest R100 or R200 every month. Here goes:

Hi there,
I am in my 20s. I just completed my university degree. I do not have a job yet but I have about R100 to R200 allowance that I would like to invest. My question is where you would suggest that I invest? Would it be in a unit trust or ETF?
Thank you.

I am so happy that you are thinking of starting to invest at your age and current financial status. That is quite commendable. There are limited options for investing R100 or R200 per month. This is due to the costs of investing in general. If I were in your position I would be creative to do either unit trust or exchange traded funds in this manner:

Unit Trusts
I would get information on the cheap/ cost effective unit trusts that exist on the market and put the R150 or so in there monthly. The best way to do research about the fund is to look at its historical performance. Check how the fund has performed in the past 10, 5 and 3 years. That's a good indication of how it will perform going forward. I would definitely keep it going and track its progress to see how it is doing.

Exchange Traded Funds (ETFs)
If you follow this blog, you will know that I am quite fond of this investing vehicle, especially for new investors and those who do not invest much time in reading financial and company news. The ETFs that I know of start at the minimum of R300 per month. However, the lump-sum investment usually starts at R1000. You may be able to save R100 to R200 in one of the banks' interest bearing accounts that allow a small amount to open. You may save your R100 to R200 in that account until it reaches at least R1000. You then invest the R1000 or more you have saved in the Exchange Traded Fund of your choice. Remember to do the research I mentioned in the paragraph above.

Savings Bonds
The bonus idea I have is putting the money in the savings account like you do with the ETFs in the paragraph above. When it reaches R1000 or more, invest it in the savings bonds. If you do not have a good understanding of how savings bonds work, go check these links... What are savings bonds and How to invest in savings bonds.

I wish you the best in your investment choice. Please do come back with the testimony to encourage another young person.

NOTE:
My mailbox is filled to the brim. I have read all the emails you sent but I can only respond to one question at a time. If you emailed me through the contact me form, be rest assured your response is on its way. I love hearing from you by the way. Thanks for your emails.
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KEEP A HIGH CREDIT SCORE

I will later give you a more detailed update on what had filled my hands for the past few days. One being the intense marketing of a property which found a tenant today and the other being lots of lay houseplan designing and architect briefings I have been drawing for the upcoming apartments project. For today we are looking at how and why we need to keep a high credit score...or NOT.

It is quite scary how we plan on being indebted ALL the time. This dependency on debt, be it good or bad debt, is what necessitates the healthy credit ratings. I am the first to admit that I have plans to get into debt in future to acquire assets that I can easily invest in with credit. Each time I act on those plans, the financial service provider (prospective lender) will look into my current and past relationship with money. This historical relationship determines how well I am likely to pay back whatever credit I want the lender to grant me. My personal finance historical data is continuously collected, stored and analysed by credit bureaus and distributed to lenders on request. This is a pretty smooth and sophisticated process that analyses both your positive and negative money decisions.

Let us now take a closer look at how those money decisions affect your credit rating:

• Credit history

The lenders use your credit payment records to assess how bad a credit risk you are. These records are made available by your previous financial service providers. Each time one gets credit, the records are kept as reference for future credit requests. The credit payment history carries the biggest weight of all determinants of your credit scoring. NB: You have to pay your debt within an agreed period consistently.

• Existing debt

This is the second most important determining factor of one's credit rating. Reducing debt can help increase one's credit score. That is of course when one has quite a bit of debt.

• Length of credit history

The new entrants in the credit game are usually viewed as high risk. This automatically reduces their credit ratings. The same goes for those who stay away from credit for long periods of time. One needs to use credit every once in a while to keep a high credit score. You will see my soapy story below.

• Type of credit

A credit card is one of the debts that are well recognised. Meaning that, keeping a credit card that is used responsibly can help boost one's credit score. The rest of the cards should also be used and paid for within the agreed time frames. It is important to actually get only the credit you will use.  

• How frequent one applies for new credit

Applying for credit frequently is perceived as a high risk factor. Each time you apply for new credit, prospective lenders request your credit report from credit bureaus. Too much requests of your credit report by lenders may affect your credit score negatively. This is seldom the case though.

Flaws in Keeping a High Credit Score
Since the credit rating is based on debt, you need to have some debt to maintain a good score. When you have no debt or history thereof, you don't get to be appraised as a disciplined consumer. What a shocker!

This also shocked me in 2013 when we were applying for a new homeloan/ mortgage. We had applied for this kind of credit a number of times before. The only difference was that, at this point we had no debt at all. We had paid up the last homeloan we had and decided to take a break from debt of all kinds. I could not believe my ears when the bond originator lady explained to me that we do not have a good credit rating. The thought of being scammed crossed my mind. The explanation I got was that, when you don't have debt, lenders are never certain of how well you would handle credit. I really laughed at the caller's ear in disbelief. The best that we could be approved for was loans on prime interest rates, with one bank going above prime.

As the saying goes, "desperate times call for desperate measures", we sought a different plan of action. We applied for a readvance on two of our old mortgages (paid fully but still open accounts). Being granted a readvance is an act of withdrawing funds from one's existing homeloan. A home owner may apply to access the funds they have paid on their mortgage. This also helps them to access the funds they paid at an original interest they were charged. This was a huge positive for us as these existing bonds were cheaper debt at prime interest rates minus 2 and prime minus 1.8 percentages. Though we seemed to have gotten lucky at the end, we never missed on the lesson.

We have since tried to rectify that by taking on some debt like it is expected of "normal" human beings. We have always had cellphone contracts which do not seem to help. The Mr now carries a credit card. We have two store cards that we use more often than we ever thought possible for crazy people like us. If we were sure we would never need a homeloan again, we would not even bother with trying to keep a high credit score. It is a fact that we only need to keep a high credit rating to get into debt like applying for a credit card, personal loan or mortgage. OK, we now have to stop demonising debt like carrying a credit card. 

Another lesson was that of not closing the fully paid mortgages. Getting an access bond may be an even better solution. The readvance application was the most difficult process I ever had to go through with the banks.  

Final Words on Building your Credit Score
Get a little into debt. I think a credit card is much safer when well handled.
Use your credit card or whatever credit you applied for just a bit.
Pay your debt on time or earlier than the set date.
Open all the bills that come via the post and email. It is so easy to miss on some debt that is lying in sealed envelopes.
If you happen to have overdue bills, talk to your service provider to make arrangements that suit your financial situation.
Do not max the credit you are offered.
Rather use the credit card for your purchases and pay the debt up within the 55 interest free days.
Do check your credit report. I get my free one annually from Trans Union.

I will respond to the emails I received this week. Please exercise a bit of patience. I really love hearing from you. Leave a comment below or email me via the "contact us" form below.
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AND WE ALL INVEST, SAVE AND AFFORD

One sure way to spend your money carelessly is by justifying your extravagance using fancy finance terminology. Think of how often you hear people mentioning investing or investment casually in their conversation. Because investing makes everything so much more sexy intelligent. Everyone of us is now an investor.

The "Save up to 70%" sale... and I spent.

If I got a rand every time a person mentioned their investing habits in 2014, I would have collected enough to buy me coffee every week this year. My friends have invested in a lot of strange ways, from pairs of shoes to fancy functions using their high limit credit cards. Some days I really wish I can just keep quiet and remind myself that it may not look right in my eyes but it seems to make them happy. And for some reason I just cant keep mum for long as if some part of this is my problem. One of the rare moments of me with a zipped mouth was in a group debate episode that tortured me for days on Facebook in 2014.

Before I say anything I have to mention that I have nothing against any sort of beauty styles that people choose to wear. We all have a right to our choices and priorities, right. So the lady in the debate starts by criticising the idea of expensive hair extensions, popularly known as weaves. The weave in question cost something in the region of R10,000. Some of the debate participants mentioned hair pieces costing twice that and above. A lot of those who argued against expensive weaves referred to them as a "waste of money" and those who were in favour of such hair pieces referred to them as an "investment". Just to humour you, I will share a bit of what I can remember from this heated debate:

The debate starter mentions how some people take three months to pay for a weave. Because I am so weave illiterate or ignorant if you prefer, I was just a spectator. Deep within I was screaming about how expensive these kinds of fake hair are; as if I am paying for them or the wearers owe me something. On a serious note, I need to stop acting as if everyone's financial decision warrants a word of wisdom from me. Everyone has their lives to live and deserves to live it in their own terms. As the conversation goes, everyone pro expensive weave continued using the terms "investment" and "affording". A lot of people in this group were confidently pointing out how they are investing in themselves and how they can afford these kinds of luxuries. I have my doubts, but there is a possibility that they are right on affording.

We all know how we tend to throw an "investment" terminology anywhere to feel awesome. Forgetting that an investment should always yield returns that can be re-invested.

noun: investment; plural noun: investments

- the action or process of investing money for profit

As a matter of fact, there are very few people who get returns from wearing any kind of a weave. Models, weave advertisers or even footballer's wives, maybe. But the rest of us are just spending and definitely not investing. Spending on what is important to us is not always a bad idea. But it is not accurate to refer to it as investing. Similarly, we tend to carelessly use of the term "saving".

In my recent visit to Menlyn Mall, I noticed the word "SALE" displayed in red in all store windows. The same stores marked their sale items, "from price X to price Y, SAVE 70%". Saving is great, except in this case one has just spent, and in most cases on something they don't have a use for. They spent 30% that they could have saved in the true sense of the word. I know I am being too serious about this, but using appropriate terminology does help put things into perspective for an individual. An appropriate choice of words would be "spend", "indulge", "luxury", "pamper", "spoil", etc, in these cases.

As a debate reached what felt like a climax, someone else confidently wrote "if we can afford it, why not". I must say, my over-analysing tendencies can go beyond frustrating.  At this point of the debate I was trying to define the word "affordability" to myself and found it too complex. The dictionary came to my rescue: 

afford
verb
- have enough money to pay for...
- be rich enough for...

Having money at ones disposal cannot only mean they can afford stuff. It simply means they can buy it. Affording should be after one has taken care of ALL their current and future financial needs. There are people who can afford a lot of stuff including that expensive weave. I don't know any among the middle class group. I also buy a lot of stuff I can do without or that I cannot really afford to buy. That may result in me encountering a shortage somewhere in the future. Or I am stealing from my kids and their kids. Whilst it is just expenditure in most cases, it does qualify to be referred to as an investment in instances whereby it is a piece of art or furniture piece that appreciates in value.

The point of this post is that, when we want to invest in ourselves we should get empowerment on something that develops us as individuals and not go out shopping for material things. When we invest in ourselves we should be able to list the returns from that investment. Like knowledge from a book, bonding time with family from a holiday, etc.

And when we are about to spend recklessly, we should always ask ourselves WHY? Is this adding value to my life or done to impress the next person? Sometimes it is a purchase just to pamper oneself. And that too is OK.

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TAX FREE SAVINGS ACCOUNT IN SOUTH AFRICA

Do you have any plans to use the soon to be launched non retirement tax free savings account in South Africa? I am asking because a number of us have been complaining about lack of motivation for savers as a direct result of a low tax incentive on interest income. I personally felt that our government has some dislike towards savers. It seems not. As from March 2015, we will have access to a new tax exempt savings and investment accounts.

non retirement tax free savings account

The South African government has hinted on the new policy to encourage households to save for a few years now. Who can blame them though. Living within our means is somewhat foreign to us. If you are not convinced, go check the employee car parking area in your workplace. I am not talking the CEO/ Managing Director/ Executive allocated parking bays because you may be surprised to see the opposite of what you expect there. We have a culture of spending and we embrace materialism. We are not big on buying experiences like travel and exploring our amazing nature reserves. But hey, we do seem to be a happy crowd. And if you dare resist the pressure to fit in, you will be bombarded with questions: When are you buying a car? (even when you are driving one); So you don't like nice stuff? (meaning very expensive clothing or furniture); Don't you think you deserve better? (meaning you should be swiping a credit card as a symbol of sophistication)...

In reality, it is in the interest of the state to encourage citizens to save. We cannot achieve sustainable  economic growth without sufficient and continuous household savings. Before we look at the details with our magnifying glasses, I have to encourage us to consider taking advantage of this with the highest level of sobriety. Apart from the annual and lifetime limits that bring complexity to this one, anything that has a tax incentive or labelled tax free should be great. That includes your retirement annuity (RA). I do hope that readers of this blog will throw themselves at this one.

The Basics of the Non retirement Tax Free Savings Account in South Africa

• One is limited to a maximum contribution of R30,000 per year and R500,000 lifetime contribution initially. This is at most R2,500 per month over a period of 12 months. Assuming that one exhausts the limit every year, they have close to 17 years of contribution period. This contribution limit will be reviewed and adjusted with inflation.
• One can use the approved bank accounts, collective investment schemes, exchange traded funds (ETFs) and retail savings bonds to access this tax incentive.
• One should only use the accredited financial service providers viz. banks, asset managers, life insurers and brokerages to access these tax-exempt savings accounts.
• Amounts that are withdrawn cannot be replaced at a later stage. Once withdrawn, one cannot get the same tax benefit by replacing the withdrawn amount.

If I were allowed to be ungrateful just for a moment, I would complain about the R30,000 annual contribution and especially the R500,000 lifetime contribution limit of this non retirement tax free savings account. Those are tiny amounts. Do not blame me, I am just being a typical South African.  The current incentive does not immediately replace the existing interest income tax exemptions. You probably know that a maximum of  R1,983 and R2,875 monthly interest earned is tax free currently. An example will be interest you earn from your money market account. This translates to an annual tax exemption of  R23,800 interest income for persons below 65 and R34 500 for people above 65. This is the tax incentive that will be replaced by the new one over time.

Be on the lookout for these types of accounts from March 2015. I definitely will. Exercise caution as not all savings accounts and investment products will carry this tax free benefit. Remember that it is not for an emergency fund type of purpose as withdrawals are discouraged with some sort of a penalty. Once you decide to save/ invest to benefit from this tax incentive, do it as a "save-and-forget about" type of decision. It seems to me that this will be implemented using the existing simple accounts and investments we are familiar with.

My take on this proposal is that, it will be more beneficial to those using high interest/ return saving vehicles like ETFs. This should translate to zero tax on dividends, fund growth and capital gains during the investment disposal. The details do get complex to imagine especially given the limit and possible withdrawals. Tracking systems will obviously be in place, so that should not give us sleepless nights. We should also treat it as a long term investment tool. You only have R500,000 chances of benefiting in your lifetime. thread with caution.

What do you make of this non retirement tax free savings account in South Africa?

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2015 PROJECT PLAN 2

Remember my decision to document the projects I plan on undertaking this year to build onto my 2015 goals. The first project being a furnished rental, with the hope of doubling the income. That was my first of maybe five projects I will work on this year. I don't know about you, but setting and documenting goals pushes me to act on them. I just try to avoid failing to achieve what I promised myself to do. I fail or change my mind sometimes, because this is real life. That will never stop me. Well, the second planned project is a small development in a small town.

2015 Project Plan 2 - Small Town Property Development

I have a few posts about the deceased estate acquisition. The main reason I actually wanted us to buy this property was to develop it further. The land is not so small, at above 800m². I changed my mind several times about this development project. The small town figures are very low given the low rental amounts. You need huge quantities to see what you are doing. And I am definitely not a quantities kind of a girl. I try to reduce the management demand of an asset to the bare minimum. Now, with the high returns (low cost) from these kinds of developments, I decided to just throw myself at this project again. The other interesting part of this project is that I can develop it in phases. It may take a full year or longer. This is how things are done in the town of choice. And like the locals I won't take a loan for this project.

Unlike in my small town, we are quite strict in Gauteng on project time frames. Even building plans expire if one does not construct on set time after submission at the local municipality. Well, my small town gives more time because, I guess we don't really have that kind of money lying around. The idea of starting on this project is getting more exciting by the day. I have a hand drawn sketch of the development with six or eight bachelor flats. The target market is young professionals like teachers, nurses, policemen, young doctors, bank employees, etc.

The Development Project Plan
I am trying very hard to not over capitalise by trying to match the standards of the existing properties in the area. However, I will definitely pay attention to the quality and maintenance of the development. The rental will be based on the local market range. Screening the tenants will have to be done with caution to lower the cost of maintenance, vacancies and ensure the longer term occupancy. I generally like a lady with a school going child. They tend to occupy the place for a longer term. Seeing that these are bachelors, I will have to see how I get tenants that are promising to stay for long. I already have a manager who lives in the area to look after development, the tenants and the units.

Those who have followed this blog for a while will know that I like to keep my rental income as passive as possible. This means getting a property manager among other things. With the location of this property, it is even more important to have a manager that is easily accessible. My manager and myself have assessed the town and saw gaps in the current rental income properties. We are looking at low cost ways to make ours more attractive. One of said ways is having all units fitted with a shower which saves space and water. We also plan to have tiny L-shaped kitchenettes in each unit.

Some of the strengths of this development include: 

• The location of the property in question is within a walking distance of a very popular school and close to a big hospital. My manager has already done the market research and has a few tenants awaiting the project. Yeah I know; my manager is pretty amazing.

• Whilst the rental prices are low, the cost of the project is even lower in comparison to metro project costs. This ensures higher development yields.

• The prospective development meets my rental property acquisition rule. Even if it were to be financed by the bank, it would generate positive passive income from the first day of occupation.

If this works out as well as I hope it will, I will repeat the process in this same town or another town of similar size. I am planning to start with the project before March and complete the first two units in a couple of months (I think two). We will have to target completion of the first two bachelors by the end of June. I think this is the target implementation time for the first project too. This will be the busiest six months for me then. But busy is always a great thing.

There goes one of my projects for 2015. Do you have plans for the coming year? 
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WISHING YOU SUCCESS IN 2015

I am so grateful for an amazing 2014. It has been a successful year, judging by the messages I received throughout the year. I also thank you for sharing this humble blog on Facebook and Twitter. Here is to setting the bar even higher in 2015:

WISHING YOU SUCCESS IN 2015

I know I'm not the best graphic designer there is. I try hey! And my photos are not too shabby.

I am rolling my sleeves, ready to work even smarter in 2015. I know you are too. Keep the momentum and stick to your plan. The journey continues!

"There is only one success - to be able to spend your life in your own way." Christopher Morley

"I don't measure a man's success by how high he climbs but how high he bounces when he hits bottom." George S. Patton

"Whenever you see a successful person you only see the public glories, never the private sacrifices to reach them." Vaibhav Shah

"The ones who are crazy enough to think they can change the world, are the ones that do." Anonymous

"Do one thing every day that scares you." Anonymous

"Your problem isn't the problem. Your reaction is the problem." Anonymous

"They succeed, because they think they can." Virgil

"Success is the sum of small efforts, repeated day-in and day-out." Robert Collier

"All progress takes place outside the comfort zone." Michael John Bobak

"Diligence is the mother of good fortune." Benjamin Disraeli

Wishing you a Successful 2015.

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REBALANCING YOUR PORTFOLIO

Taking an objective look at our assets may lead to us acquiring high performing and/ or selling investments that are not performing as well as we hoped they would. At some point it gets pointless to hold on to an asset that does not yield expected returns. If one cannot rework the returns of a particular asset, they may as well get rid of it completely. We don't want to waste our time and energy on an obvious loss. This is the situation we find ourselves in right now with a few of our properties. These particular units are not performing negatively, but have overtime fallen outside our target market. I am not the one to manage a strategy that lacks focus. We will try to price them to go rather quick. The other obvious factor is our  growing focus on risk. You may have noticed that I have been writing about rebalancing our portfolio based on risk reduction and the incorporation of savings bonds into our assets. It is all explained in this one post, hopefully.

One of my main interests is building on passive income. I am obviously planning on being location independent and working or playing wherever I find myself in this planet. This is the reason I love writing and investing. Our ideal portfolio should incorporate real estate, stocks, retirement funds and savings bonds. Our passive income sources are rental from property and a small amount from dividends with semi passive income from a small online business. Getting rid of a portion of the real estate investment will help grow our portfolio across various asset classes. This does not mean that we are done growing our real estate investments though.

It always helps looking at a portfolio in a pie chart format. Ideally I would want my pie chart to look like this:

Rebalancing your Portfolio Fig1.

But sadly it looks like this:

Rebalancing your Portfolio Fig2.

My ideal asset allocation is currently largely based growing the net worth whilst taking risk levels into account. We do wish to acquire more assets and grow them quicker i.e. stocks. However, with the markets having a mind of their own, we would be more comfortable with a balance between real estate and stocks. And of course bonds are great to preserve some of our funds. Let us not forget the importance of the retirement funds, especially given their tax benefits.

Given the current state of our portfolio, we will most likely take some of the proceeds from the property sale into the stocks. Whilst that is a bit unlikely, it is a possibility. The most likely method for us would be to get the income from the rental property into the stocks every month to grow the stocks. We also need to start with the savings bonds by growing the existing savings accounts (partly emergency fund) which later have to feed into the bonds every year. To simplify the last statement: The savings accounts which are stashed in the money market accounts at the moment will have to be  grown and used to invest into the savings bonds every year. Every month, a specific amount of money is transferred into the money market accounts. I don't prefer to have my interest reaching a taxable amount. This is the reason I am looking forward to building the bond ladder. 

Rebalancing your portfolio should be among the most important annual personal finance events in your life. I will be tracking this balance monthly as I check on my personal finance excel spreadsheets.

Hope 2015 will be our best year ever. Thanks for your love, questions and support in 2014. Let us grow together and do even better.

More blessings,
M.

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