In a depressed market, such as the one we are currently in, many people ask themselves whether it is more financially prudent to buy their own home or to rent one instead.

“While the level of South Africans who now own their property has risen dramatically over the last decade, with the ever increasing cost of living coupled with high personal debt-to-income ratios, many South Africans are purposefully selling their homes in order to downgrade their lifestyle to more affordable levels,” says Adrian Goslett, CEO of RE/MAX of Southern Africa.

Goslett says that this has resulted in the need for many people to rent instead of buying a home. Rentals are also being fuelled by the fact that house prices remain relatively high when compared to earnings, the banks’ lending criteria remains strict and deposits are still required. “All these factors combined have meant that the move towards renting is gaining an ever increasing momentum.”

The great news for buy-to-let investors is that the ‘renting trend’ is one that is not only growing in South Africa, but also in other countries around the world. In fact, says Goslett, it is expected that in the UK, the percentage of people who will be renting instead of buying their homes will grow by as much as 20%, while in countries such as Germany for example, over two thirds of the population do not own their own home.

Although this rental trend may seem high, says Goslett, the reality is that in many cases, renting is much more affordable than buying. “Renting lowers your financial risk. In the current market, houses are difficult to sell and renting is much less of a risky proposal should you lose your job and suddenly have the need to downgrade to a less expensive property.

“Renting also gives you the freedom to be able to relocate to a new city for a job, and when you compare apples with apples, you could probably afford to rent a home equal to, if not better than what you could afford to buy.”

However, he says that the number one argument for renting lies in the fact that there are other kinds of investments that will offer a much higher return. “The theory goes like this – investing in property can be an expensive exercise when you take the costs involved in buying a property such as the transfer duty, bond registration fees and other legal fees, connection fees and moving fees. You also pay interest on a bond, and don’t forget the rates and taxes, the maintenance and insurance costs and the costs for the general upkeep of the property.

“Add all these expenses together, as well as the difference between the rent you would pay versus what you would have to spend on your monthly home loan instalment, and this would leave you with a sizeable amount of money.”

If you are disciplined enough to save and invest this money, says Goslett, it is estimated that you should be able to save enough money to buy a home cash over a period of 10 or so years, use it to reinvest in other avenues, or keep it as a nest egg for retirement purposes.

However, therein lies the crux of the matter – this kind of financial thesis is exclusively for the disciplined investor. “Unfortunately, most people do not have the required restraint to do this – if they have extra money, most people just end up increasing their living standards by buying more expensive cars, going on better holidays, or buying luxury goods for themselves or their home.”

Goslett says that the big argument for buying a home instead of renting one is that owning your own home is a forced kind of saving. “The truth is most South Africans do not save enough money for when they are older. However, being able to sell your home that you paid off over 20 years, and downsizing to a smaller dwelling will no doubt offer welcome financial relief when it is needed most. What would these people do if they had decided to rent 20 years ago?”

In order to benefit from buying property, Goslett advises that consumers get into the property market as early as possible. “The earlier you start, the better off you will be. Also, keep in mind that any 20-year bond repayment will come down dramatically in real terms as your salary increases with inflation (assuming there are no drastic changes in the interest rates). This means that even though you might have to tighten your belt to ensure you have enough money for the monthly payments when you initially start, they will become much more affordable as time goes on.”

Goslett says the key to successful property investment is to pay off your bond as soon as you can, live in your home for a minimum of five years so that you can recoup some of the initial costs, and to buy only what you can afford.

But, he says, there are both pros and cons to renting a property as well as for buying one. “Everyone has different criteria and levels of affordability.  Renting can allow you to suss out an area or complex to make sure you like it before you make a long term commitment, or to allow you time to save up for a deposit. On the other hand, the sooner you can start paying off your own bond, the better off you will be with an asset to your name that will certainly show good returns over the long term.”

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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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Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

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