Cardinal rules for second home investment
- 16 Jan 2012
But while the allure of an idyllic holiday location may tempt many a buyer, Adrian Goslett, CEO of RE/MAX of Southern Africa, says that there are some definite do’s and don’ts when it comes to holiday home investments.
“Firstly, based on the fundamental economic principle of supply and demand, a well-chosen holiday home can, over the long term, be an excellent investment as more often than not, these properties remain limited by geography and limited supply will lead to price growth,” he says.
Goslett points out that for those who can afford it, a well-chosen second home could be a sound investment that generates an income through rentals, and one that could also be used as a retirement investment.
However, as with any property purchase, holiday home investors need to do their research to ensure that their investment will be a viable one. When looking at a holiday home investment, Goslett says buyers should follow these five cardinal rules:
- Be sure that the property is situated in a good, popular location as location is not only important in terms of the capital appreciation over time, but is also an important factor in attracting tenants.
- Be sure that they can afford it. Buyers should calculate the acquisition costs such as a deposit, transfer fees and conveyancing fees, as well as the impact of possible interest rate increases, ongoing monthly maintenance, security and insurance costs as well as the rates, taxes and utility tariffs in the area.
- Consider the practical implications of managing a property in a different town. Goslett suggest that holiday home owners consider appointing a professional rental management company or realtor that can conduct regular inspections and screen, select and place tenants.
- Understand holiday rental trends in the area, especially if rental payments are to be used to help pay off the bond. Rental returns fluctuate widely for holiday homes, depending on the location and the season, however proximity to the beach and a sea or mountain view makes a big difference to what rental can be charged.
- Know the tax implications. Holiday home investors should remember that any rental income needs to be declared on their annual income tax return. Investors will also be liable for capital gains tax should the property be sold or transferred into another name.
Goslett says however, that it is important to always bear in mind that at best, the values of properties in holiday locations tend to be volatile. “Generally speaking,” he says, “during recessionary times, the leisure property markets tends to take the worst knock as holiday homes are high on the list of expendable assets. But while holiday properties tend to be lagging behind in the property market recovery, for those in the market to buy a holiday home, there are currently many well-priced leisure properties on the market from which to choose.”
Goslett concludes by saying that in today’s stressful, and often financially driven world, the benefit of owning a leisure property is twofold: it provides a safe haven that will allow you to escape the rat race every now and again along with a solid return on investment, if you have purchased wisely and undertaken all the relevant due diligence.