The year-end holidays are drawing closer and more and more people are looking forward to enjoying some sun, sea and surf. There is no doubt, however, that while they are enjoying their end-of-year break, many will be tempted to buy a holiday home or apartment.

Although the temptation is big it is not a decision to be entered into lightly as investing in property is a long term commitment, warns Adrian Goslett, CEO of RE/MAX of Southern Africa.

“When investing in a leisure property it is important to make sure you are purchasing with your head and not just your heart.”

Before you decide to purchase a property you should know the detailed answers to the following questions – why are you buying the real estate in the first place and to what end? In other words, what end result does that property need to produce for you in the long run and is this a realistic expectation?

In order to answer these questions you need to do a bit of homework, says Goslett. He offers the following points that should be considered before any potential investor makes up their mind:

1. Purchase in a prime location

When selecting holiday investment properties it is best to choose a prime location, preferably with beach or mountain views.

Capital growth is usually strongest in areas that boast a well-established economic base and good infrastructure. The area should also offer a host of high quality lifestyle amenities such as restaurants, cafes, bars, shopping centres and tourist hotspots.

2. Looking to the future

It is important to understand that there are a number of factors that can impinge on the capital growth of your leisure property. Before signing on the dotted line, do your homework and check to see if there are any nearby developments planned as they can negatively affect the value and the rental yield of your property.

Also, if your property has a view, make sure that it is there to stay and nothing can be built to hinder it.

3. Understanding holiday rentals

Generally speaking, the average period of strong demand for holiday rentals is approximately eight to 10 weeks a year. Demand usually drops considerably in winter, but it tends to remain more consistent in warmer locations where holiday-makers can escape the cold winter months.

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 you can ask. If the property you want to buy is a fair distance to the beach, you should possibly consider a permanent tenant rather than holiday letting.

4. The property should be self-contained

Even though smaller holiday homes may yield a higher rental return on purchase price, it is always better to choose a self-contained apartment with larger rooms and a separate kitchen, laundry, bathroom and bedrooms.

A property such as this will definitely boast a better capital growth and once the property is paid up it could be an option to use it as a retirement base in your later years.

This kind of accommodation is also more suitable for family-rentals and thus easier to rent out.

Also, as with any investment, your focus should be on well-constructed, low maintenance properties.

5. Sectional title matters  

When it comes to sectional title units it is essential to check the financials and management track record of the body corporate.

If you are investing in a sectional title unit you will become liable for any debts that the body corporate may have incurred and as such it is important to check that everything is as it should be before you sign on the dotted line.

With regards to the maintenance of the common areas of the complex – this will often make the difference between an empty and occupied apartment unit, so do a bit of research into how these areas are maintained throughout the year.

6. Outsourcing help

Since you won’t be living in the property you will need to outsource various professionals to help you maintain it such as leasing agents as well as garden, security and cleaning services.

Make sure you understand what these costs will be.  The old adage of “you get what you pay for” is, as always, true for these services and it is essential that you choose a reputable company that has experience dealing with these types of properties and one that understands the highly competitive nature of the holiday accommodation market.

7. Do your numbers

Investing in a holiday home can be a costly exercise and it is essential that you work out what the worst case scenario might be and whether you can afford it.

Although holiday rentals are usually much higher than those for normal properties, and increase even more during peak seasons, it is important to understand that you need to allow for longer vacancy periods and fluctuating occupancy levels from season to season. This coupled with high body corporate fees, management fees as well as maintenance and replacement costs means holding costs may be higher than you initially estimated. The annual maintenance and replacement costs for leisure properties, for example, is estimated to be in the region of four to five percent of the rental income, and the cost of property management usually comes in at around 15 percent of your rental income.

8. Holiday properties are volatile

It is important to always bear in mind that, at best, the values of properties in holiday locations tend to be volatile. Generally speaking, during recessionary times the leisure property markets tend to take the worst beating of all as holiday homes are high on the list of expendable assets. In South Africa, for example, even though residential house prices are gently on the rise, seaside homes seem to be bucking this trend. This is not surprising since the household sector remains cash-strapped and it is obvious that consumers will tend to focus more on essential primary residential buying.  As such, holiday properties tend to be lagging behind in the recovery.

This may be bad news for sellers, but good news for those in the market to buy a holiday home as there are currently many leisure properties on the market from which to choose.

9. Tax implications

Obviously, if you earn money through rentals on your holiday home you have to declare the income in your tax return.

While you should be able to claim deductions for the time that you rent out your leisure property, these must be proportioned according to the time it was rented out and the time used for your own personal use.

Also, since the holiday home will not be your main residence, you will have to pay capital gains tax when you sell it or transfer it into someone else’s name.

10. Insurance counts

Remember to factor insurance into the cost of owning a holiday home – you will require both home owners’ insurance, household insurance and, if you are going to rent it out, you will require public liability insurance as well. It is important that you take out public liability insurance to cover any possible claims from tenants or holidaymakers.

Accidental damage cover in your household policy is another option that can be considered – this will cover any accidental losses by tenants.

With the interest rate at an all time low, and the fact that there is a range of value-for-money leisure properties on the market, if you are an experienced investor looking to diversify your portfolio and lifestyle, investing in a leisure property is worth thinking about.

“There is no better time to invest than now as there are some real bargains to be found at the moment,” concludes Goslett.

11. Financing leisure property

Mortgage Plus works with all major lenders and private banks in South Africa, giving it the advantage of sourcing the best possible product for each customer.
Its vision for the future is to continue raising the innovation bar in financial industry as well as maintaining unwavering ethical behaviour, responsible business practices, and delivering a service which matches this ethos.

Remember by choosing us for a loan, you will get professional advice to make sure you are getting the best deal possible.

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Access Bond Facility – This allows you to deposit and draw funds from your home loan up to a set amount.

Agreement of Sale / Offer to Purchase – Contract is signed by a buyer and seller stating the terms and conditions under which the property will be sold

Annual Premium – This is the premium payable once a year in respect of a life assurance or a home owner’s insurance policy.

Attorney – When buying property two different attorneys are involved; Transferring and Registration Attorney. The Seller gets to nominate the Transferring attorney whereas the purchaser gets to nominate the Registration / Bond Attorney

Assessment – The bank’s assessed value of the property

Assessment Fee – This fee pays for the administration work that accompanies a property assessment.

BA Linked Rate – Rate linked to 3 month BA SAFEX rate which can be monitored on an ongoing basis. This option guarantees a fixed rate for three months. The rate will change every three months in line with the cost of short term funding rates. This type of product normally has a minimum loan size and a maximum loan to value qualification criteria.

Balance Sheet – Used for the recording of the financial positions of private individuals, companies, cc’s and trusts.

Bearer / Seller – The legal owner of a piece of property.

Bona Fide – In good faith.

Bond Costs – These are the conveyance’s fees, stamp duty and VAT. They are payable by the buyer to the attorney attending to the registration of the bond on behalf of the bank. Conveyancing fees and stamp duty are calculated on a sliding scale based on the bond registered.

Bond registration fee – The fee charged for the registration of the home loan in the buyer’s name

Bond Term – This is the original term of the loan

Borrower (Mortgagor) – An individual who applies for and receives funds in the form of a loan and is obligated to repay the loan in full under the terms of the loan.

Broker / Estate Agent – An individual who brings buyers and sellers together and assists in negotiating contracts for a client.

Building Contract – A Contract between the land buyer and the builder, outlining the specifications of the building.

Building Loan – A Loan granted to a buyer who buys a vacant plot of land on which he intends to build

Buyer’s Market – Market conditions that favour buyers. With more sellers than buyers in the market, sellers may be forced to make substantial price concessions.

Capped Rate – Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage can change in an adjustment interval and/or over the life of the loan.

Ceiling – The maximum allowable interest rate of a variable rate mortgage

Collateral – Assets (such as your home) pledged as security for a home loan by either yourself or a relative

Contract of Sale – The agreement between the buyer and seller on the purchase price, terms, and conditions of a sale.

Conveyance – The document used to effect a transfer, such as a deed, or mortgage.

Cooling off period – This clause is included in an offer to purchase a property under R250 000. It is based on a new law allowing first time home buyers the opportunity to change their minds within five days of signing the offer.

Credit Bureau – A credit bureau is a clearinghouse for credit history information.

Credit Report / Profile – A report detailing the credit history of a prospective borrower that’s used to help determine borrower creditworthiness. There are 2 main Credit companies used by lenders in South Africa, namely ITC and Experian. These companies collate credit history on individuals and companies, which they obtain from various sources in the retail market place and legal system. Your bank account history is another important source of credit information used by lenders in assessing your credit profile.

Credit Score – A statistical method of assessing your creditworthiness. Your credit card history; amount of outstanding debt; the type of credit you use; negative information such as bankruptcies or late payments; collection accounts and judgments; too little credit history and too many credit lines with the maximum amount borrowed are all included in credit-scoring models to determine your credit score.

Deed – Legal document by which title to real property is transferred from one owner to another. The deed contains a description of the property, and is signed, witnessed, and delivered to the buyer at closing.
Deeds Office – This is a government department whose task it is to attend to the registration of transfers of Immovable property

Deeds Office Registration Fees – These fees are charged by the Deeds Office for registering the mortgage bond and the title deed

Default – Failure to meet legal obligations in a contract, including failure to make payments on a loan.

Deposit / collateral – The deposit is the part of the purchase price of the property that you pay in cash up front and reduces the amount that you will need to lend. A lender prefers a deposit as it means that the borrower has a financial commitment, in the property and the home loan required is less than the current market value of the property. For this reason the loan to value concept is an important factor in negotiating rate concessions and obtaining loan approval with minimum supporting documentation. Collateral other than property is also taken into account when calculating your loan to value ratio.When a borrower does not have cash available for a deposit, other acceptable types of collateral security include, but are not limited to the following :Shares, fixed deposit, bank/company/government gurantees, debt free immovable property, life assurance policies.

Equity – This is the amount by which the value if a bonded property exceeds the amount owing on the loan
Finance Charge – This is the interest charged by the bank on the loan

Foreclosure (or Repossession) – Legal process by which a mortgaged property may be sold to pay off a mortgage loan that is in default.

Freehold – When you own the property and the land that it’s build on, and within building regulations you are able to renovate and or extend to the outside of your property.

Grace Period – Period of time during which a loan payment may be made after its due date without incurring a late penalty. The grace period is specified as part of the terms of the loan in the Note.

Gross Income – Total income before taxes or expenses are deducted.

Home loan Application – An initial statement of personal and financial information required to apply for a loan

Installment amount – This is the basic monthly installment amount payable on the home loan, excluding insurance or assurance premium, where applicable \

Interest – Charge paid for borrowing money, calculated as a percentage of the remaining balance of the amount borrowed

Interest Rate – The annual rate of interest on the loan, expressed as a percentage of 100.

Joint Liability – Liability shared among two or more people, each of whom is liable for the full debt.

Latent Defect – This is a fault or flaw that is not immediately detectable or is hidden from view on inspection of the property

Lender – The bank, mortgage company, or mortgage broker offering the loan.

Loan + Costs – This product allows the borrower to lend more than 100% of the property value. It is geared for the first time homeowner and allows the borrower to include registration and transfer costs with the purchase price of the home

Loan-to-Value Ratio (LTV) – This is the percentage the bank is willing to lend you, expressed as a percentage of the bank’s estimated value of the property and the loan amount requiredLoan to Value (LTV) = [home loan amount required divided by assessed property value] x 100 Home loans of up to and exceeding a LTV of 100% may in certain circumstances be granted, subject to an acceptable Affordability Factor and valuation of the property in question.

Monthly instalments – Over the term of your loan, you will repay your home loan by way of regular monthly payments of principal and interest. Monthly installments are normally paid to the lender via debit order from your account. During the first few years, most of your payments will be applied towards interest. During the final years of your loan, your payment amounts will be applied primarily to the remaining principal debt. The amount of your monthlyinstalment can be affected by changes in interest rate and changes to the principal amount of your loan. As a rule of thumb your monthly installment should not exceed 30% of your gross monthly income.

Mortgage Broker – An individual or company that arranges financing for borrowers.

Mortgage or Bond – An agreement between you and the bank, stating that the bank will lend you a certain amount of money in the form of a home loan, and that you will pay the bank back over a certain period, on a monthly basis, and at a certain interest rate.

Notice of Default – Written notice to a borrower that a default has occurred and that legal action may be taken.

Occupation – This is the date the buyer moves into the property

Occupational Rental – This is paid by the buyer to the seller at an agreed amount, if the buyer decides to move into the property before transfer of ownership takes place.

Offer to Purchase – This is an offer in writing from the buyer to the seller, which is usually prepared by the estate agent. Once signed, by all parties it becomes a legal and binding contract between the buyer and the seller

Power of Attorney – Legal document authorizing one person to act on behalf of another.

Pre-approval – A lender’s firm commitment on a loan and it enables you to enter into negotiations with confidence. A pre-approval includes a preliminary screening of a borrower’s credit history. Information submitted during pre-approval is subject to verification at application.

Pre-qualification – Pre-qualifying gives you a general idea of your borrowing power. It is the process of determining how much money you will be eligible to borrow

Purchase Agreement / Deed of Sale – Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Reducing / Step Down Rate – Regardless of whether the variable home loan interest rate falls or rises, the reducing interest rate option will apply for the agreed period (usually less than 5 years). This facility guarantees you that your interest rate will decrease by a set percentage every three to six months for the agreed period. Should this option be terminated before the expiry date an additional finance charge can be levied by the lender.

Registration – This is the process whereby ownership of the property is transferred form the seller to the buyer via a deed of transfer. Your home loan will be secured at the Deeds office as a mortgage bond.

Repayment Terms – The length of your home loan repayment period with the financial institution. The longer your repayment period the lower your instalments. The maximum repayment period is 20 years and is dependant on the home loan amount.

Second Mortgage – An additional mortgage placed on a property that has rights that are inferior to the first mortgage.

Sectional Title – An entire complex block of flats etc. divided into individual units, sold separately and no one of the owners has the right to extend to the property.

Stamp Duty – This is a tax obligatory by the government

Short Fall – Short fall is more likely when it comes to a building loan. This is when value in the property is higher than the bond granted from the bank. In other words the client has paid a big amount in cash and did not use the banks money.

For more info on Home Loans, Bonds and Mortgages please call us on (011)327-4489

www.mortgagepluscc.co.za