Ask a financial planner – Should I diversify into student housing?
Good day, I’m 45 years old and read that others my age, and even retired people, invest in student housing instead of pension funds. I have invested in a Retirement Annuity all my working life and would like to know if I should withdraw a portion of the annuity and purchase one or two flats and market to students? What net yields do you think I can get and based on annual rental inflation, will the income I derive from student housing keep pace with annual CPI inflation? – Thumi
Dear Thumi, thank you for the question, we will start off by discussing Retirement Annuities (RA). RAs are governed by the Pension Fund Act. No liquidity is provided before retirement (minimum age 55) or formal emigration. As you are 45 years of age, you will not be able to access any funds from your retirement annuity.
At the age of 55 you will have access to 1/3 of the accumulated value subject to tax according to the Lumpsum Retirement Withdrawal tax table. Based on current tax legislation no Income Tax, Dividend Withholding Tax or Capital Gains Tax is payable within an RA. Additionally no estate duty and executor fees are payable at death.
Contributions to an RA are tax deductible up to a maximum of 27.5% of greater remuneration or taxable income (excluding retirement fund lumpsum or withdrawal and severance benefits) limited to R350,000 per year.
Lastly, RAs are protected against claims from creditors.
Owning an investment property is a reasonable form of diversification in a portfolio. An investment property can be funded in full or part by cash or with debt (a bond).
When purchasing a property there are a number of upfront cost to consider such as:
- Transfer duty
- Lawyer’s fee for the transfer as well as if you take a bond
- Deposit for electricity and rates
- Deposit for a bond
Income received from the rental property is taxable and expenses, including the interest portion of the bond repayment, incurred on the property are tax deductible. The net rental income can be used to offset the bond payments.
On the sale of the property, you might incur Capital Gains Tax. In the event of death, you might incur Capital Gains Tax, Executor fees and Estate duty.
There is a market for student housing as the demand for student housing exceeds the supply for university-provided student accommodation. The housing provided by the university is not sufficient for the number of students that start university each year. Therefore, students need to look for accommodation outside of the official residences.
Accommodation closer to the university is more expensive, therefore properties within close proximity to university are worth more and are therefore sold at a premium.
Students sometimes pay rent for only 10 months of the year and as such the following concerns should be considered:
- Property being vacant
- You will be liable for maintenance of the property
- Further expenses such as levies, electricity and water depending on the rental contract
Although this can be a good long-term investment, there are always risks involved. The lack of diversification in investing in one or two properties must also be considered.
Yields on student accommodation are typically higher than that of other investment properties due to the aforementioned supply/demand mismatch. As with any sweetened yield this does attract additional risk.
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Words: Thuli Nkomo, internal IFA, at NFB Financial Services Group