Starting a property business: Need advice

[julies]

Hi everyone

I'm looking for advice on starting my property business...

Currently I own two properties that i would like to rent out. 1) A garden flat 2) And a town house unit in a section 21

The town house is paid up, but property on which the garden flat is located I am still paying the bond.

Currently I manage both properties, but would also like to manage the properties of other landlords in the future.

Everything is run as a sole prop.

With regards to the rental income from the properties, I need to use the income to pay for my bond as well as take a property management fee for the business so that I can pay myself a small salary.
I am also using some of the rental income to fix the rental properties as well as fix the main house in which i live that on my bond. Can all these other expenses be deducted.

Basically I am a sole prop. that started a Rental management business (BLG Rentals and Property Management ) , but I am also the only client of the business.

Not sure if this is all making sense

How would I go about setting this up into a proper business as a sole prop and keep records, or do i have to form a separate registered company.

Thanks

[Phil Cooper]

Bear in mind that you will need to register with the Estate Agents Board if you are going to handle / collect rents for third parties.

Like everything else in SA they make it hard for SMEs to operate due to the paperwork.....

[Basment Dweller]

Hey Julies,

I'm currently adding 5 properties to our portfolio as a result of a development and have managed and run two properties for the past 7 years. I'm also going through some set up processes.

Try and follow the '1% rule' with rentals i.e. make sure the rent pays the bond and leaves you some profits. If you have to put extra money into the bond after rental then you're better off selling and investing somewhere else.

Always have cash in the bank for vacancies and repairs at least 3 months rental for each property. Build up as much cash as you can cause something always comes up, geyser breaks, tenant stops paying, legal fees, evictions. When something goes wrong you need to move fast. Double check your insurance policies, I just had a water leakage problem and got stiffed on the bill as there was no coverage.

I registered a company and am currently transfering all properties into the company, I set up a business banking account and plan to run all expenses through the same account the rental money goes to. I scan all receipts and save them in google drive expenses folder. I'm looking into getting some accounting software, maybe quickbooks?

any ideas from your side?

[Houses4Rent]

Basically I am a sole prop. that started a Rental management business (BLG Rentals and Property Management ) , but I am also the only client of the business.
How would I go about setting this up into a proper business as a sole prop and keep records, or do i have to form a separate registered company.
Thanks

I think you are getting mixed up a bit. A proper business can in my view never be run as a sole prop. Its not advisable either.

Keep your own properties as one side business and the property mgt company as your main business. See above to get qualified and registered with EAAB first. You are your own client until then.

I pretty much did what you are planning to do as even started as a sole prop. After less than a year I learnt a great deal about business (this is my first one) and immediately started a CC which is now no longer available. Now I know better hence my suggestion to start a proper company from day one.

[Houses4Rent]

I registered a company and am currently transfering all properties into the company, I set up a business banking account and plan to run all expenses through the same account the rental money goes to.

Why did you transfer your properties into the company? That is a sale and you have to pay a lot of legal fees and transfer duties unless each is worth less than R600k.
I by far prefer a property trust. I kept my old units in the entity they were in and all new I buy in a trust.

[julies]

Thanks... just to clarify
My town house is paid up there is no bond.
My other property is a granny flat in my yard, I am still paying my bond

Ok lets leave the idea of trying to manage other peoples property for now, that's probably wont happen anytime soon.

So what you guys are suggesting is the following:
1) I need to get registered with the EAAB first if I want to manage other peoples property and receive rent for them (thats the future)
2) If I am only managing and receiving rent for my own property I don't need to register with the EAAB
3) I should set up a proper company with a bank account to receive me rental income and process all my expenses
4) I should make sure I have cash in reserves for an emergency etc
5) I should keep my existing property in my name to save in costs
6) Any new property that I buy I should consider placing them in a Property trust

@Houses4Rent--- If I receive my rental income in my business account, how would I service my bond as the property is not in the name of the business, and I don't plan on transferring the existing property to the business.
Would I receive the rent in the business bank account and then the business deducts the management fee , before I pay out the rest to my personal account to help service my bond. Also if any things need to be fixed in the property who would pay for this, me the owner from my personal account or would the repairs be done from the business bank account.

This is why I wanted to keep it as a sole prop for now, so that I can deduct as much as I can from my rental income profits to help service my bond and also fix my own house and extend the granny flat to make the place bigger, thus being able to charge more for rent

@BasementDweller-- I use Turbo Cash Accounting software (free) , but quickbooks is also good

[Basment Dweller]

Why did you transfer your properties into the company? That is a sale and you have to pay a lot of legal fees and transfer duties unless each is worth less than R600k.
I by far prefer a property trust.

It's a little complicated.

These properties were the result of a property development of which we had 45% holding in. We owned the original development land and started a JV with a development partner and some other investors. We built 32 luxury apartments and sold all of them except five. The other partners cashed out and we opted to take the remaining five units as payment transferring our shares. So long story short, we have 5 units (including two penthouses) unencumbered after taxes, legal, finance, building and all other cost. Since we were effectively both the developer and the buyer of the units at the same time, the assets were going from one hand into the other, and we got some big discounts.

Yes we had to pay a hefty VAT bill but we wanted the units out of the development company and into a shelf company of our own so that we don't have any hidden liabilities.

Now the units are in the shelf company of which I direct and own 15%, the remaining 85% went to an inter vivos trust that was set up to benefit my parents in their retirement. My brother and I are trustees and we have an independent on the board as well. After much research and consultation, this was the solution we came up with to ensure the proceeds of the property would benefit my parents (since my mom was the donor of the development land) and also provide my brother and I some exposure and control. I got a 15% cut since I had more skin in the game as set the whole project up whilst everyone else was overseas. Its gonna be interesting to see how things work out, making decisions with family is always tough but we had to do something.

[Houses4Rent]

At Julies: In that case you do not need a business and a business bank account. If the properties stay in your name you just do all as a private individual. You do not even dream up a company name and sole prop unless you want to for some reason. Sole prop and yourself is all the same anyway. Its all simply private (natural person). Unless I am missing something that is...

[Houses4Rent]

At Basement Dweller: Makes all more sense now, I suspected something is not as simple as it sounded. So effectively the units stay in the trust.

2 Penthouses, I see. so how does the "basement dweller" come from? :-)

[Basment Dweller]

@ Julies: having a fully paid off property puts you in a strong position to leverage and buy another property, I'm not sure on what your financial situation is but you should look into expanding your portfolio buy one property every year or two, I know people who are doing this and have many properties all bringing in cash.

@House4Rent: those nice plush penthouses would be wasted on me if I lived in them, I'd rather live in squaller in favour of having good cashflow!

[julies]

Currently I am invoicing my tenants using the name BLG rentals.. I guess I am using the name as a way to "tell" my tenants its a business and not a mickey mouse operation haha, and also just a way for me to keep track of everything and separate the my salary from my rental income.. I do know that sars will see it all as one thing.

[Houses4Rent]

Ok, now the separation is a waste as its not required. I however suggest you keep doing it as it will be much easier to continue the habit once you have a separate business. I still find the separation quite challenging in my 2 man band working from home.

[Basment Dweller]

Check this website http://www.rentalpropertyreporter.com/landlord-tips/

[Houses4Rent]

Its all American based, totally different laws and regulations I bet. Rather stick to RSA stuff.
Thanks anyway as I am going to buy in USA soon - if all works to plan. However, I would leave such stuff to the hired mgt company.

[reuphk]

@ Julies
You have an interesting situation.
Here is what I would have done with it (just my view)
1. Take the money out of the bond account of the townhouse and pay it on the bond of the house you are living in.
Reason: Rental property expenses are tax deductible (incl the interest on the bond), for your own property it is not.
2. Buy another property (in a Trust), using some of that cash you release to pay duties etc.
The Trust is a separate legal entity from you (sole proprietor) - too many tax benefits to explain here
3. Use the income from the granny flat to pay me a "salary"

Sorry, cannot give an opinion on starting a rental agency (that is what you mean by "manage the properties of other landlords in the future"?). Maybe do that as a Sole Proprietor (depending on your other income and tax status), or even start a Pty Ltd, but separate your own property investment portfolio from that in my view.