I currently own two properties and am acquiring a third. All properties still have a balance on the bond. What I am struggling with is deciding how to proceed with paying them off:
- Property 1 balance: R520 000, with rental income of R5 250 per month, interest on the bond is 8%;
- Property 2 balance: R310 000, with rental income of R4 250 per month; interest on the bond is 7%;
- Property 3 balance: R1 100 000, interest on the bond is 8%.
Property 1 and 2 are tenanted out and the third is the one we will live in.
My options are as follows:
- Pay off Property 2 and use the income to offset the monthly instalment of Property 3;
- Pay all extra cash into Property 3 and not have an income from 1 and 2.
I’m sort of stuck between what to do …
You are in an interesting position and pose good questions, thank you.
If I can summarise your property position as follows:
Property 1: Rental – R5,250 per month as rental income – 8% interest on the bond and R520,000 outstanding on the bond amount.
Property 2: Rental – R4,250 per month as rental income – 7% interest on bond and R310,000 outstanding on the bond amount.
Property 3: Primary residence – No income – R1,100,000 outstanding on bond at 8% interest rate.
There is a bigger conversation to have here that I think will lead you to your answer. That is tax.
A couple of points on tax on property which will help us:
Rental income from property is added to your taxable income. Depending on what tax rate you fall into, this will be the tax you pay on the rental income. Also, important to note that if you show more than R30,000 a year in rental profit (income less expenses) this may lead to you having to register for provisional tax.
On rental properties, the following are allowable expenses that can be used to deduct from your income. This essentially lowers your tax liability:
- Rates and taxes;
- Agent and rental fees;
- Accountants fees;
- Bond interest;
- Garden service;
- Security; and
- Repairs and maintenance
The most notable expense relating to this question is bond interest. You can offset the interest you are paying on the bonds linked to your rental properties. This means your profit will be less and pay less tax.
Based on this, I would recommend that you pay any spare cash into your primary residence bond (Property 3). The sooner you pay off the bond on your primary residence the better. There are no benefits in keeping a bond in place on a primary residence.
By paying more into your primary bond, you will free up some cash flow that you can use for other investments or just add to the extra into your bond every month. Your primary bond has one of the higher interest rates at 8%. Also, a good idea to settle debts with a higher interest rate.
I hope that this helps you in making your very important decision.