BUYING A PROPERTY IN A TRUST OR INDIVIDUAL'S NAME

Today's email came at a time the Mr and myself were looking at our options regarding our small portfolio. We have been busy researching whether buying a property in a trust or individual's name or even a company would be more beneficial for us. At the end we were at the "it depends" position. There is never a one size fits all. My understanding is that, when we have a bigger development, we will definitely buy and sell the land/ properties using a company. But for now, our individual names and a trust will do. Our reader has interesting question in this regard:

Thank you so much for this blog. My passion has been restored. And after what I have gone through in my life, I now know what I will be working for. I am currently unemployed because I am using a spousal permit which does not allow me to work.
I have a few questions for you.
Are all the properties you have under your name or how do you do it?
Is there a limit as to the number of properties you can register in your name in South Africa?
Regards,
SG

Pleasure SG. I am glad that this little blog is helping people to dream and work on their passions. I have never heard of a limit in the number of properties one can buy in their own name in South Africa. I cannot imagine a reason why there would be such a restriction.

Buying a Property in a Company's Name
I actually do not know of any advantages in buying a property in a company's name when one is a long term investor or lives in that particular property. The company pays all the taxes and costs that an individual property owner is liable to pay. This is usually at different times but everyone does pay. In some instances, companies may pay more in capital gains taxes. Buying through one's company or trading trust would make perfect sense for property developers who sell large stocks at a time and property flippers who are constantly having properties on the market.

Buying a Property in a Trust
When it comes to making a choice between buying a property in a trust or individual's name, most property investors choose to buy their investment properties through family trusts. There are a lot more  arguments for trusts compared to those against them. The biggest issue is it being less complex to deal with by beneficiaries in the case of the founder's death. That is unlike the case where one is dealing with an individual's estate which attracts extra costs like estate duties and other fees and taxes. Trusts, not being individuals and being independent of their founders are not liable for the estate duty taxes. The trust does seem to offer a smoother transition in cases of death. I have heard a lot of South Africans arguing about the trust protecting one's personal assets from creditors in the cases of the investments turning sour and therefore offering protection against insolvency.

Having said all that, one has to bear in mind that trusts generally pay high taxes. the last time I checked, income tax for trusts was at a rate of 40 percent. The organisation of the trust is another factor as the trust has to be in the administration of all trustees and not just an individual investor. When one registers a trust, they give control and decision making over to the trustees. A founder cannot just take investment decisions alone. Another factor would be that, a trust may in some instances pay more than what an individual is required to in capital gains tax.

My advise to anyone who does not know what option to go with is that... Do your homework. A trust that is not properly administered and run can lead to a disaster. One's beneficiary may end up losing at the end. If one chooses a trust, it has to be run as a trust and never a company. Trustees have to be properly involved in decision making. 

A trust with some cash should do better than the one that still needs to borrow from the mortgage lenders to acquire assets. Banks can be skeptical to lend to a trust or require a larger equity/ deposit compared to what they would require from the natural person. Legal and maybe financial advise could help. 

Note:
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HAVING MONEY WORK FOR YOU

Today's reader email is from another youngster who is towards reaching financial independence really fast. If you are as wise as this young professional, you may soon be having money work for you.

Hi there

I have recently sold my car to replace it with something cheaper, I freed myself from debt (Retail accounts, and credit card) with R75,000 to spare.

Aged 26 I would like to invest this money in hopes to buy my first property at 30 with a massive lump sum.

I am thinking of putting it in some type of fund where I can add about R2,000 a month to it. I would like to have the money available to me within 3 to 4 years time, and often I come across 5 year type of funds only. What would you suggest if the best route to take with this?

K

Well done on choosing to live your life in your terms K. I wish more young people were half as wise. As this email is very similar to the one I published two posts ago, I will only point our reader to it at: Diversifying a Portfolio. I may also recommend: Building Wealth from your First Job. Now onto the interesting stuff that may also help this reader and others on having money work for them.

Having Money Work for you
My friend asked a question along the "money working hard for someone" lines today. As expected I was too excited to engage in the debate and because I am a bit of a nut case, I am still as excited to repeat myself here now. The fact is that, you will never be able to work harder than money is capable of. I learnt this awesome truth over the years. You are just one person with limitations. Your money on the other hand can multiply itself forever. So why do what your money can do for you? Look at the examples below.

Compound Interest
A simple example of a baker who bakes cookies to sell them to various office workers. As a baker, you are only capable of baking a finite number of cookies and make a finite amount of profit per day, because you only have 24 hours minus 8 sleeping hours, 1 bath hour, 1 stock buying hour, 1 social networking hour, 2 other chores hours, etc. Do you realise just how limited your time is? Anyway you do bake cookies and make your nice profit daily. From that profit you decide to put R2,000 aside every month in an interest bearing account like a bank money market account or savings bonds if it were possible. For the purpose of this example, lets put the interest rate at 8.5% per annum. You save this amount of money for 10 years.

Monthly savings - R2,000
Interest Rate - 8.5%
Term - 10 years
Total amount saved - R240,000
Interest earned - R138,942
Total - R378,942

As you were busy sleeping, buying stock, baking cookies, driving around to deliver and doing a lot of lousy stuff in between, the monthly R2,000 that you worked for was busy working hard for you. It made R138,942 in interest for you. That is just one way of having money work for you. 

Growth from High Performing Exchange Traded Funds (ETFs)
Another similar example is that of high performing ETFs. I will push it to the one that yields 25% per year. By the way that is not the best one can achieve with ETFs. My son is with the one that yields close to 40% every year since he started.

Monthly investment - R2,000
Interest Rate - 25%
Term - 10 years
Total amount invested - R240,000
Growth - R825,609
Total - R1,065,609

How is this for money working for someone? Your R2,000 per month could only be summed to R240,000 in 10 years. But because it was hard at work every second of the day, it single handedly produced an extra R825,609. That turned you into a Millionaire. Don't you just love how amazing this can turn out to be?

(Almost) Passive Income
Now we look at one having a lump sum to invest in stocks that bear high dividends. One can get thousands of rands in dividends monthly over a medium term period of investing. This is of course after one has selected good quality and high dividend stocks.

Another example is that of a rental property. I like it when an investor buys a bargain property in a high rental demand area and puts it on the market. If you bought right, price wise, you may be killing it in the net rental income. That is what I mean by having money work hard for you.

Not passive at all, is flipping a property. It is a lot of short term work. We actually bought a property in an active property market area 6 months ago. We did clean the property up for about 2 months part time. We are now getting interest from buyers at more than 50% in profit. If we were to push it a bit, even close to 100% in profits is possible. That is another way of making your money work for you. And if you used the homeloan to buy, you may even be making someone else's money work for you.

Reaching Financial Independence
Remember how you start your working life, working harder and harder for your money. You may, if you are fortunate, start investing your earnings early in your life. You may also start a side hustle just because you can. Your investments may be earning you some passive income like dividends. Your passive income may at some point catch up with your salary... it actually does at some point.

At that point you realise that you do not even need to be working for your money because your money is now working for you. That is a definition of financial independence or like some refer to it, financial freedom. It is a stage where you never need to work for money ever again in your life. You may still hold a job because you love to. But whether you do have a job or not, money pours into your account. You may take a year traveling the world or volunteering in the local orphanage, and your passive income will sustain you.

Everyone should be working towards reaching financial independence. Who wants to need to work forever?

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