Cash in shares to buy a house?

2011-06-03 09:13

A Fin24 user writes:

I have a dilemma. I have invested heavily in the stock market over the last two-and-a-half years and have done pretty well.

I have about R400 000 in stocks (of which about a third is growth on capital).

With my income, the bank is likely to only give me a bond of about R1.1m.

By cashing in the stocks and using them as a down payment, I can look to afford a R1.5m property. We live pretty frugally and could probably even afford the instalments on a R1.5m bond, but with the new credit act that is of course a moot point.

The stock portfolio is to a large degree my retirement fund, but with house prices and interest rates so low, I do feel now is a good time to buy.

Since I am only 30 and my income can be expected to grow substantially over the next few years through re-positioning within my job, I feel I should be able to make up for the retirement fund loss in a relatively short period of time.

Should I cash in my shares and buy a house, or should I maybe wait a couple of years for my income to allow me to buy a R1.5m property without the necessity of cashing in the stocks?

Nick Dekker, a financial planner with Ultima Financial Planners in Pretoria, responds:

Both property and shares offer long-term capital growth, beating inflation over the long term.

Which one will perform best over the next 25 to 30 years? Who knows for certain? I am not going to speculate on which one will or might outperform the other; I will, however, mention a few points to put some expectations in context.

Even though residential property might seem slightly more affordable compared to two or three years ago, average growth over the long term has to be taken into account.
During the 1980s when interest rates peaked at above 20% and with political instability in SA, residential property values were not really going anywhere. Similarly, property prices were stuck in the 1990s due to uncertainty about the elections and new government.

But in the 2000s, thanks to lower interest rates and greater confidence in the country, residential property made up for the stagnant previous two decades. The last decade is what people tend to remember.

Compare it with the share market.

The main purpose of business is to produce profits. This is done by increasing profitability of companies and sharing the profit between shareholders. When profits are down, management will tend to focus on how to restructure a business to increase profitability to the required levels.

This profit-driven process has proven over time to produce superior returns compared to other types of investments like property, bonds and cash. People tend to overemphasise the short-term volatility risk of share pricing, which is no true measure of the share value.

It is unclear in your question whether you have you invested directly in the shares – or is the investment through a retirement product?

If it is a direct investment in the market and your share portfolio is merely considered as retirement provision, let's first look at the tax implication of selling your shares to buy a house.

Selling your shares will attract immediate capital gains tax (CGT). The actual tax on the said amount of R400 000 would be minimal as the first R20 000 of the actual gains will be excluded, and thereafter only 25% of the actual gain will be included in your annual returns for tax purposes.

Transfer duty on a property worth R1.1m will be around R17 000, compared to R37 000 on a property worth R1.5m.   

If you hold on to your share portfolio, you will still earn your dividends annually and pay CGT upon sale of the shares. Currently individuals are not taxed on dividends, but this will change on April 1 2012 as the new Dividend Tax will replace Secondary Tax on Companies (STC).

This change, however, is a technical one where the company will pay the tax of 10% in the name of the shareholder, whereas currently tax of 10% is paid by the company in its own name.

If the share portfolio you refer to is actually invested in an approved retirement product (retirement annuity, pension or provident fund), there are of course other considerations.

These funds are usually not easily accessible before retirement age (in the case of pension and provident funds) or age 55 (for retirement annuity funds). I therefore assume that your mentioned retirement fund is in a preservation fund where you have an option to make a once-off withdrawal prior to retirement. Cashing in your retirement fund before you retire will immediately attract tax.

Upon withdrawal before retirement, only the first R22 500 will be taxed at 0% and the rest at 18% (up to R600 000). This will leave you (on an amount of R400 000) with only about R332 000 after tax.

Being invested in shares through a retirement platform means the investment structure is governed by legislation, giving certain guidelines and constraints. One of these is that your funds may not be invested in a single share or stock at any one time. It has to be somewhat diversified.

In effect, you will have to compare the prospects of tax-free growth on a diversified share portfolio of R400 000, or a lifestyle asset where you only have the benefit of about R332 000, "earning interest" (the interest you gain by not borrowing this amount) in a low interest rate environment.

And further, your retirement savings have been wiped out. Pushing your taxed retirement funding into a single lifestyle asset doesn't seem to make sense as the more expensive property would mean that you will not (at least for now) have the budgetary means of again "catching up" on your lost retirement benefit.

With the information at hand, at least for now, I wouldn't cash in shares for a lavish lifestyle just yet. Rather, wait until you can afford the bigger, more expensive house. After all, you mentioned the prospects of future income growth. Rather consider saving the excess income (left at the end of the month) until you have enough to put down as deposit on a more expensive house.

It would be advisable to get in contact with a qualified fee-based financial planner and have your goals and means documented in a financial plan.

- Fin24

  • JCB - 2011-06-03 09:55

    Thanks Nick. At last a planner with more knowledge that just broking insurance companies' products!!

  • Sabrina - 2011-06-03 10:47

    Hi can i have the details of this person as i would like to learn how to invest in stocks?

  • Hannu - 2011-06-03 15:14

    There is a bit more to it than explained, when you sell the house in 5 years time, you will cash in on growth on the value of the property, not just the R332k invested. CGT is not applicable if you sell your prime recidence for the first time. If your property increase at an average of 5% pa, your return will be on par with the average stock market gains. One should also consider the fact that if the property market takes off, you will struggle to afford a normal home, let a lone your dream home. Interest rates are set to increase from around the first quater of next year. The property market is stable and the probability of loosing your money is less than on the stock exchange, especially in the next 6 months. Consider diversifying your portfolio into property by no later than this time next year, otherwise you might miss the next bull run on the property cycle.

  • piet.strydom - 2011-06-03 16:52

    Eish so many words, so little meaning. Point 1: Don't increase your overheads, i.e. don't buy a more expensive house. Point 2: Educate yourself on investing - there are many good books out there. Point 3: Plan the work, getting professional help where needed to set goals. E.g. for living too long, for dying to soon, for getting ill and not dying, childrens Uni etc. Point 4: Work the plan. It will probably involve to some extent diversifying into rental properties. (As opposed to living in a more expensive house yourself.) The problem with most of these investment guys, is the compare the growth in property prices, with the growth in share prices. That is not adequate. You need to compare the return on what YOU put into an investment. And for property, you usually put in a fraction of the value of the property. Gary Player always used to say, three pillars - Cash, Equity and Property. Some balance between the three.

      aliennator - 2011-06-03 20:26

      I have heard about this three pillars statement,-in other words Piet if i understand it right. you should have "cash" in the bank payed of property and equity goes hand in hand with a payed off property? so my Equity is that what i made (RENTAL)after all debts associated with that asset(property) are paid off. if you can clear this for me please i find this intresting and would want to know how i can apply this in my current afairs.. if you dont mind educating me here pls

      piet.strydom - 2011-06-27 14:24

      HI Alienator "Equity" can mean different things. The way you used it, it means what the difference is between the value of your house, and what you owe the bank. But it also means shares and those kinds of assets you buy on the JSE and elsewhere. It is generally the idea not to have all your properties completely paid off. Try and get hold of a book like Rich Dad Poor Dad (Robert Kiyosaki's) Cash Flow quadrant. It gives VERY useful information, which you don't need a 5 year degree to understand.

  • Gerald - 2011-06-03 18:55

    Too young to invest like 100% in a house. Investment theory takes you through a persons life cycle and, supported by backtesting, its shown that one is best taking more risk earlier in life, then easing it off gradually. Actuaries have also proven it mathematically. As a (optional) rule of thumb, the % of ones assts in high risk (equitites) must always roughly equal 100 - age on a beta of 1. Ups and downs yes, but our friend neednt let go of all that much yet for long-lasting WEALTH.

  • pgibbings1 - 2011-06-04 11:29

    Remember,owning property has costs (often high) associated with it. For instance your rates and taxes, repairs etc. On the plus side, most sellers at the moment have to reduce their price in order to secure a sale, so you can benefit from negotiation. They would rather reduce their price than to keep paying property rates for the house which would eventually make the sale at higher price not worth it. A house costing R1.1 million will probably have a higher capital growth than a house costing R1.5 million because of the emerging middle class, and the capital gains/transfer tax breaks for primary residences. See the rent you'd save on renting a property as like income - You'll probably save about 4-5k a month more each month as opposed to renting a townhouse, but you have benefit of ownership. Saving on the rent effectively lowers your overall finance cost, while allowing you to own a property and enjoy benefits. Add the capital growth to that and you should get a reasonable long term return on investment if and when you decide to sell. Consider also looking at townhouses that are in need of repairs and maintenance, normally you can strike a good bargain with the seller. Fix it up - the restoration (not renovation) will probably cost a lot less than the saving on the price. That been said, just make sure plumbing, kitchen and bathroom are in good condition because that is very expensive to fix up.

  • Accountant - 2011-06-05 13:03

    @Hannu Hannu please take a look at various charts of long-term growth performance for different investment classes, Equities wins every time, every survey, every country. residential property is not a good investment however commercial property is sometimes attractive. The whole global financial crisis that we now find ourselves in has been largely caused by the overvalue of residential property! I don't think the next property "boom" you talk about is going to happen any time soon and neither do the experts quite frankly. There is still a massive surplus of liquidated property developments and houses for sale in just about every town in the World, the US economy is going through a double dip recession and the EU debt crisis rages on... how do you interpret this scenario as being on the brink of the next property boom please enlighten me?

  • Nasdaq7 - 2011-06-06 16:30

    I would keep my money in the stock market and search for an outstanding deal. Even if it takes two years. Find the one property deal that is exceptionally good. It seems to me you just want to rush in and buy a house you like. You need to see property as a long term investment. You need to look at property the same way you look at shares. And if you can score on the stock market and score big time in purchasing a really good house at a discount price. Then you've hit a double jackpot.

  • stefan.vanderspuy - 2011-06-07 08:16

    This new has made my day!

  • Luigi - 2011-06-07 09:04

    Shop around,you can get a great house for R1,1 mil and if you really go at it for even lower and use the R400k as a deposit but keep your monthly installment at a higher premium so that when you reach 40 you have a house that is paid up.In the long run property is still the best bet.

  • Willem Ras - 2011-06-08 00:45

    Just do it! You can't live in you Billitons. Work harder and when you have cash then you can buy more Billitons again. Remember to keep an extra Billiton for a great bottle of wine & maybe another two just to spoil your partner!

  • DirtySamurai - 2011-06-08 15:38

    My 5 cents: Buy an undercapitalised property in as good an area as possible for the R1.1mn, with say a 10% deposit. There will also be costs of maybe 50k to pay. Then spend R50k - R100k on renovations to make it in line with the area. Leave the remainder in shares and add the extra money you save from lower rates (cheaper property) and lower fuel bill (living in better/more central area) to your bond or equity portfolio depending on your views. Remember to keep a buffer for 3-5% interest rate increases.

  • bond.ridhoo - 2011-06-08 18:00

    Hi. You should invest you shares in gold which WILL more than double in the next max 2 years. Then cash out and buy a property which should be nearly the same prices as todays. Otherwise if you buy now, you will be paying long term and also not have the investment. With the bigger investment in 2 years, you will save on a lifetime of low interest repayments. And also if you buy now, to recover your current investment will be hard since you have a property to furnish and look after. Always wait and push yourself to the maximum period before buying. Youre 30 now...buying at 32 for R1.5m is still an excellent achievement. With gold rising in front of our eyes daily, we must be blind to miss this if we had cash to invest. This is my opinion - nothing factual.

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