EARLY RETIREMENT AND PROPERTY INVESTING

The combination of early retirement and property investing is the reason this blog exists. I am a part time personal finance coach with passion for property investing. My plan has always been property investing for financial freedom and early retirement.  Any other investing that I do is meant to balance my portfolio out and manage the risk. This is why it thrilled me to receive the email from one reader below:

Hey Mbini
I just stumbled upon your blog while doing some research on emergency funds, and I must say I found a Gem. I am very interested in early retirement and property investing and this is the first South African blog I have found on both subjects, most blogs I follow are either from the USA or Europe and sometimes it’s difficult for me to follow some of their advice as it doesn’t pertain to South Africa. So thanks for the blog it will help immensely in my own early retirement and property investing journey.
Kind Regards

Early Retirement and Property Investing

Thanks reader for your email. Emails like this one are humbling. I have benefited from sharing what I know on wealth building here more than anyone can imagine. Having someone else gain value from the blog blesses me.

Like most, I am a product of a "go to school; get good grades; get a job; work hard; retire comfortably at 65" generation. In case you haven't noticed "Living" is not part of that equation. I did follow that common “wisdom” by going to school and getting good grades. I was quite a competitive learner. I was never fond of books but I had a way to make it. And so I found myself being a graduate and moving towards the next goal of getting a job so I can work hard and retire just before death.

This is where I had a problem. I needed life before retirement. I doubt if anyone wants to work hard just to retire and die. Yet, everyone seemed to expect a successful life to follow this "logical" sequence. I was desperate to add “live” before and after the job in my own life equation. I needed to live because having a business as a student meant less living. Working hard until retirement was never an option.  And so my own formula became:

[go to school; get good grades; live; get a job; live; retire; live]

50 percent of my life was to be more about living than anything else. Living requires some level of preparedness. It is about working towards doing what you want to do. Living is about searching for your passion and pursuing it wholeheartedly. Working until 65 sounded... very wrong to me. I am neither a careerist nor a specialist. Throughout my life I have invested in a lot of unrelated studies and businesses. I have to be constantly excited about something new.

And so in my 20s, just after investing in my first apartment, I stumbled upon a book “Rich Dad, Poor Dad”. And like the Buddhist Proverb states, “When the student is ready, the teacher will appear”; that was what I needed. At that point I had gone from selling candy in primary school to paying my way through university selling soft furnishings manufactured by myself and trying my luck at MLM after graduating to supplement my low income. I was more than determined to fit in the "live" variable in my life equation and do so in my own terms. That is how a property investor within me was born.

I immersed myself in investment related reading material until I understood the basics well enough to start implementing. After getting married to a like-minded guy, we joined forces to pursue the “early retirement and property investing” dream. This does not feel anything like work. I am enjoying every single minute of it, including sharing it here in this post right now. It has become part of me that I get irritable when I am not inhaling dust doing quality control in a construction site.

We initially bought tiny homes to let and slowly changed our investment strategy to bigger homes in high demand upmarket suburbs and are gradually getting into commercial property. Whats more exciting is that I get invites to talk to small groups of young professionals and couples on living debt free, savings, growing wealth, early retirement and property investing. And, yeah, I write here too. And guess what… I am living. This passion keeps me alive.

Just remember that this is a business. And like any other business one needs a proper strategy and a good plan to execute it. For a very long time I heavily relied on my property manager to keep everything together. Building systems helps any business to run itself. One will always need people who know and do just about anything that needs to be done. And that enables one to “live”.

I am glad that I chose to “live”.

Note:
Thanks for the amazing emails. I keep all emails anonymous when I do respond to them through this platform. Feel free to make a follow up question or comment using the "Contact Us" button above.

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LOW COST TAX-FREE INVESTMENT

My previous post on the Tax-Free savings account looked at the investor who has the R30,000 R33,000 per year. This excludes a whole lot of people who are still busy fighting debt or afford less. Its only fair to go through a different low cost tax-free investment exercise. Reading this post together with the previous one may be beneficial as some of the information given in that post helps clarify this tax benefit better. You may also look at the other post on tax free savings and the one on Exchange Traded Funds (ETFs).

The most effortless way to invest in shares is through ETFs in my opinion. This should be a great option for those who lack the time and resources to invest in individual company and industry research. Losing money in the stocks, especially when you do not have a well-informed strategy is quite easy. The stress that goes with speculation can be outsourced to ''experts'' who are well trained to read the markets. A hands-on approach is also not a bad idea for inquisitive minds like mine. It is important to remember that, only a few of us can manage to be jacks of all trades with success. Definitely not me. That is the reason I strive for a diversified portfolio, with some loyalty to property investing. Real estate is my passion and what I have chosen to pursue. I am well pleased with the fact that it remains my main source of income. But that is not the point of this post.

Our low cost tax-free investment exercise will be on a R500 per month amount. To spice the exercise a bit, I am throwing in R3000 extra from the investor's annual bonus. I have such an overactive imagination, I know. Our investment qualifies to be referred to as low cost because ETFs are generally relatively cheap investments.

Remember that you can invest your monthly R500 in one ETF, a combination of two ETFs or even a combination that includes any other two qualifying products. National Treasury mentioned the collective investment schemes, bank savings accounts, fixed deposits, retail savings bonds, REITs, etc, as qualifying products. Let us quickly list our assumptions:

• Similarly to our previous example, I am using 25% annual return. (Again this is attainable).
• Monthly Investment of R500
• Every year, the investor adds a R3,000 into the fund from their annual bonus
• Return per annum 25%
• Term in years 16 (I am using the same number of years from our previous exercise for consistency’s sake. More years at this amount make better investment sense.)
• Tax Rate 0%
• All income like dividends earned is re-invested
• There are no withdrawals throughout the investment period

Year	Beginning of Year	Interest	End of Year	Contribution
Year 1	R3,500	R1,720.12	R10,720.12	R9,000
Year 2	R14,220.12	R4,729.59	R24,449.71	R18,000
Year 3	R27,949.71	R8,583.92	R42,033.63	R27,000
Year 4	R45,533.63	R13,520.30	R64,553.92	R36,000
Year 5	R68,053.92	R19,842.44	R93,396.36	R45,000
Year 6	R96,896.36	R27,939.41	R130,335.79	R54,000
Year 7	R133,835.79	R38,309.48	R177,645.27	R63,000
Year 8	R181,145.27	R51,590.75	R238,236.02	R72,000
Year 9	R241,736.02	R68,600.49	R315,836.51	R81,000
Year 10	R319,336.51	R90,385.39	R415,221.91	R90,000
Year 11	R418,721.91	R118,286.03	R542,507.92	R99,000
Year 12	R546,007.92	R154,019.21	R705,527.13	R108,000
Year 13	R709,027.13	R199,783.86	R914,310.99	R117,000
Year 14	R917,810.99	R258,396.06	R1,181,707.05	R126,000
Year 15	R1,185,207.05	R333,462.57	R1,524,169.64	R135,000
Year 16	R1,527,669.64	R429,602.64	R1,962,772.27	R144,000

Results

• Total Amount Invested is R144,000 ((R500 X 12)+(3000))X16
• End of Term Balance is R1,962,772.27
• Total Interest (income) earned R1,818,772.27

It does look impossible to turn R500 per month into almost R2 Million, but if this particular fund continues performing as well as it currently does, this outcome is a possibility. As mentioned in the previous post, this government incentive means no income tax, no dividends withholding tax and no capital gains tax.

Once again, please do:

1. Ensure that your investment product of choice does qualify to be one of the tax free savings accounts. Most exchange traded funds (ETFs) qualify.
2. Note that our exercise is on a 16 year term, however one can go on until they reach the allowed maximum contribution of R500,000 in their lifetime (at the moment: August 2015) whilst avoiding to exceed R30,000 (increased to R33,000 in 2017) in any one year.
3. Note that withdrawals cannot be re-invested and still count as part of the lifetime limit.
4. Report to SARS in the section under income earned in the tax free account and declare your income as non-taxable.

Note:
Thanks for the amazing emails. I keep all emails anonymous when I do respond to them through this platform. Feel free to make a follow up question or comment using the "Contact Us" button above.

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CHOOSING ETFS FOR MY TAX FREE SAVINGS ACCOUNT

If you have been following this blog for a while, you will probably have guessed that I will be choosing ETFs for my tax free savings account. I’m quite predictable, I know hey. I have a bit of an obsession with the Exchange Traded Funds and have written about them quite a bit in this blog especially when I was giving investing advise to teenagers, to those in their 20s and general information to those who email me questions. The ETFs remain the best choice for those who prefer to take a less hands on approach to equities investing.

There are a number of ways that one can use to take advantage of the new tax free savings. I cannot have been the only one who patiently waited to see if the exchange traded funds will be suited to the tax free savings account. How delighted I was to read that all institutions that have a banking or collective investment scheme license will be eligible to offer products through this tax free savings or investment account. This benefit is actually even extended to stockbrokers that are registered with the Financial Services Board (FSB) and the Johannesburg Stock Exchange (JSE). In all, almost all certified financial service providers can easily offer products that exploit this great benefit.

Most will agree that R30,000 R33,000 per year (maximum) is quite a lot of money to be saved in a low performing savings account. Ag, any amount of money should be invested where it attracts a decent amount of interest. I definitely think my R33,000 would be better off invested in the ETF or a combination of ETFs than in most savings accounts that are in existence. That's the reason that I am choosing ETFs for my tax free savings account.

Below is a little exercise to see how one can potentially gain in the ETF investment with this generous tax benefit.
NB: the exercise is based on the initial tax free account annual allowance of R30,000. This has been increased to R33,000 from March 2017.

Assumptions: 

• I am using 25% return. (The ETF that my son is currently using averaged 27.67% per year over 5 years and around 30% during my son's investment period).
• Annual Investment at the beginning of each year R30,000
• Return per annum 25% 
• Term in years 16 
• Tax Rate 0% 
•  All income like dividends earned is re-invested
• No withdrawals throughout the investment period

Year	Contribution	Beginning of Year	Interest	End of Year
Year 1	R30,000.00	R30,000.00	R7,500.00	R37,500.00
Year 2	R60,000.00	R67,500.00	R16,875.00	R84,375.00
Year 3	R90,000.00	R114,375.00	R28,593.74	R142,968.75
Year 4	R120,000.00	R172,968.75	R43,242.19	R216,210.94
Year 5	R150,000.00	R246,210.94	R61,552.73	R307,763.67
Year 6	R180,000.00	R337,763.67	R84,440.94	R422,204.59
Year 7	R210,000.00	R452,204.59	R113,051.15	R565,255.74
Year 8	R240,000.00	R595,255.74	R148,813.93	R744,069.67
Year 9	R270,000.00	R774,069.67	R193,517.41	R967,587.09
Year 10	R300,000.00	R997,587.09	R249,396.75	R1,246,983.86
Year 11	R330,000.00	R1,276,983.86	R319,245.97	R1,596,229.83
Year 12	R360,000.00	R1,626,229.83	R406,557.47	R2,032,787.28
Year 13	R390,000.00	R2,062,787.28	R515,696.81	R2,578,484.11
Year 14	R420,000.00	R2,608,484.11	R652,121.02	R3,260,605.13
Year 15	R450,000.00	R3,290,605.13	R822,651.28	R4,113,256.41
Year 16	R480,000.00	R4,143,256.41	R1,035,814.10	R5,179,070.52

Results

• Total Amount Invested R480,000.00  (R30,000 X 16)
• End of Term Balance R5,179,070.52 
• Total Interest (income) earned R4,699,070.52

Choosing ETFs for my tax free savings account

I know, this looks a bit far-fetched. Well it may be a bit optimistic but it is possible to turn R480,000 to R5 Million in less than two decades (keeping all other things equal). Even more awesome is the fact that dividends and capital gains will attract no income tax, no dividends withholding tax and definitely no capital gains tax.

Important to Note:

1. Double check with the financial service provider that your investment product of choice qualifies to be one of the tax free savings accounts. Typical accounts that qualify include the collective investment schemes, bank savings accounts, fixed deposits, retail savings bonds, REITs, etc. 
2. National Treasury did confirm that most exchange traded funds (ETFs) do qualify. However, direct share purchases do not qualify.
3. Exceeding the yearly contribution of R33,000 (current limit in 2017) will attract the tax on the amount above the limit. The R33,000 yearly and R500,000 lifetime contribution may be reviewed and adjusted based on affordability conditions and inflation. 
4. Withdrawals are discouraged and cannot be re-invested. This results in the tax benefit being forfeited.
5. Both your service provider and yourself will be required to do annual reporting through SARS annual returns in the section under the income earned in the tax free account and declared as non-taxable income.  

Note:
It has been a hectic few months. Exciting times ahead. I will be renovating a multi-family property soon. I will let you in on the ups and downs of acquiring this property.

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