Andile asks: We are in the process of buying a second home now that we have children. The challenge we face is whether we rent our current house out or sell it.
I prefer we sell it and invest the money in shares but my wife thinks we should rent it out to make extra income. The house is paid up. What do you think?
Maya replies: First of all, congratulations on having a home paid up. It shows good financial discipline and with that attitude you will always find that you will be financially secure.
The question really comes down to property versus shares as a preferred investment. There isn’t really any right or wrong answer unless you have a crystal ball and can tell which asset class will perform the best over the next 10 years.
But there are some things to consider:
How does your financial plan look at this stage? Do you already have investments and retirement savings or is your home your only asset?
If your home is your only asset and you have put all your savings into it, then you may want to consider diversifying. You can do this in two ways.
You could sell the property and invest in a share portfolio or you could take the rental income each month and invest that into unit trusts.
It is very important that you use the rental income to build wealth and not to spend.
Property
For many people the upside of property is that it is tangible, they can see it and the property is not re-pricing everyday on the stock market so you worry less about it. The downside is that you have to deal with tenants and the income is taxable.
If you still have an access bond on the first property it would make sense to draw on that to offset the purchase price of your new property as the interest on the bond can be offset against the rental income.
Shares
If you have the discipline to leave your shares to grow and not panic and switch frequently then it can be a hassle-free investment. Although from next year dividends will be taxed it will be at a lower rate than the tax you will pay on the rental income. Shares are also a lot easier to sell than a property.
Be aware that at the moment the markets are quite volatile given the disruptions in North Africa, so get advice before investing the lump sum.
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