With June celebrated as Youth Month, Jonathan Kohler, CEO of Landsdowne Investment Properties shares, what he believes to be, the best way to help your child get a foot on the property ladder way ahead of their peers.
“Parents can help their children get onto the property ladder well before they’re even out of nappies,” explains Kohler. “If they buy an investment property. This can be a great investment for their child’s future.”
“Buying an investment property for your child is a little different from buying a house for your family to live in. In many ways, it provides even greater potential gains, but you need to expand your investment horizons to maximise that potential,” says Kohler.
If you were to buy a one bedroom, one bathroom investment property apartment for a child when they’re born, the home loan for the property would have been paid off, at minimum, by the time your child is 20 years old.
For over 12 years in the residential sectional title space, the one bedroom apartment has been the best investment property performer. Property prices can range between R750,000 to R1m in this sector of the market.
The rental achievable for studio and 1 bedroom apartment range from R5,000 to R8,500 per month – dependant on the location and positioning within the complex. This rental price point constitutes the largest amount of quality tenants in South Africa.
Affordability for these clients should be calculated, the same way banks pre-qualify clients for a home loan, their gross monthly income should be three times or greater than that of the monthly rental amount. So, to qualify for a monthly rental of R5,000 per month, a tenant would need to earn a gross income of R15,000 a month. Similarly, to qualify for a rental amount of R8,500 a month you would need a gross income of R25, 500 a month.
“Property can be a great investment for a child. At best, it grows in value and helps secure their future. If the worst happens and the property falls in value or remains stagnant, at least they will have property they can hold on to during the lull in the market. The one bed, one bathroom property market is relatively immune to volatility in the market, as there are always tenants that fit this criteria,” adds Kohler.
- 1 bedroom ground floor apartment
- Price: 740,000 (transfer duty free)
- Rental: R7,000
- Levy: R977
- Rates: R320
- Net rental return: 9.25%/ per annum
- Appreciation: 8% per annum
- Total return on investment: 17.25% per annum
The top 3 tips to protect your investment:
- Maintain full ownership of the property until your child is responsible enough to use it wisely.
- Many financial advisers recommend maintaining an interest in a property even after transferring the title to your child’s name. This gives you some control and can help prevent a young adult from making a disastrous mistake.
- Getting your child involved in the maintenance and management of the property will help prepare them for taking ownership.
Kohler says that while the property investment will help get your child on the property ladder, gifting your child, a property will have tax ramifications, including transfer duty and capital gains tax, so it is best to discuss these impacts with your tax adviser to ensure you fully understand all of the considerations and impacts.
Regardless, this gift will help your child to get into the property market and will catapult their financial wellbeing well before they realise the gift you’ve given them.
#HomeTimesHelps Check out How to pay of a R1m home in ten years and consider using the maths to teach your child a valuable lesson. Once your child is old enough to get pocket money or start working over weekends ask them to save just R300 a month and pay that into the bond of your investment property. It will save interest and could shave up to two years off the bond repayment term!