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Rental property vs unit trusts: which type of investment is better?

Published Nov 6, 2021


In this precarious investment climate it is always important to do the necessary research to determine the best strategy for you. Each person’s investment plan should be tailored to their circumstances and all aspects should be considered before investing. This is according to Lana Visser, a financial planner at Fiscal Private Client Services. She looks at the pros and cons of a unit trust versus a rental property investment, and how each will impact your cash flow and tax return.

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What to consider

  • Availability:
  • Affordability:
  • Term of investment:
  • Tax consequences
  • Liquidity:

Based on the recent property reports, property values are currently growing at an average of around 4% per year. This is the potential growth that you would receive on your rental property itself, excluding the rental income you will receive. Note, however, that there are many factors that will influence the price of your property when sold, including location and the recent sale prices of other similar properties in the area.

Alternatively, a long-term unit trust investment could achieve an annual return of 10% net of fees. This is provided that distributions are reinvested each year, which most investors do when building up their portfolio.

Tax consequences

One of the advantages of a rental property is the monthly income that it provides. On the downside, says Visser, “one should always remember that this income is taxable and if you are employed, this could put you in a higher tax bracket, which means owing more to the tax man. Note that tax is only paid on the net rental for the year, so one is able to deduct rental-related expenses, such as levies and rates, as well as the interest portion of your bond instalments, should you have a bond. If you do not have a rental agent, it is important to keep all documents as proof of these expenses. The tax on rental income is paid when submitting your tax return every year and this could cause cash flow issues if provision has not been made for this expense.”

There are also tax consequences for unit trust investments. Tax is payable on the interest portion of the distributions received from a unit trust investment. Visser explains: “Each individual is entitled to an annual interest exemption, which will help reduce the actual taxable interest.”

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While dividends are subject to tax, they are paid out after tax, which means that no tax payment is required from you.

In addition to taxes payable each year, capital gains tax is payable on the “profit” made on your investment when sold. “It is likely that the capital gains on the unit trust would be higher than a property and this estimate will need to be factored in when making your decision,” Visser says.


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Another thing to consider is the costs. For a unit trust, the applicable costs would be the investment management fees charged for the funds you are invested in, any platform administration fees applicable, as well as the financial adviser’s fee, should you have one. When purchasing a property, there are initial costs payable, such as conveyancing attorney fees, transfer costs and bond costs. Property maintenance costs should be considered, and it is safe to assume that a certain percentage of the rental income will need to be spent on the upkeep of your property, and more so if it happens to be an older building.

Real estate investing: factors to consider

  • What happens if you don’t have a tenant? The expenses don’t fall away if rent is no longer received. It is a mistake to assume you will have a 100% occupancy.
  • What if you have difficult tenants? Is the trouble worth the income? This could also lead to legal fees, if necessary.
  • There could be damages to your property. Even when insured, if you cannot have a tenant in your property while it is being repaired, you lose rental income.
  • Should you need access to your capital, consider a depressed market where you could struggle to sell your property. As opposed to a unit trust investment, you cannot sell a portion of it if you only require access to some of your money.

Stock market investing: factors to consider

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  • Markets could crash, resulting in losses on your investments.
  • Fund choice may be poor, which could result in lower than expected returns.
  • What other investments do you have and what are the tax consequences of them. Is your entire portfolio properly diversified and invested in a tax efficient way?

Your investment strategy should be as unique as you are

Every investment strategy has its advantages and disadvantages and determining which one is suitable, is dependent on each individual’s needs. Visser says:, “It is always important to consider both sides of every coin before investing and make sure that you see the full picture in order to help you make the very best decision suited to your needs. It is also important to always consult the right people who can guide you. It is key to speak to a financial planner before you intend to invest.”