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

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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.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

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Sectional Title

One of the ‘issues’ with which sectional title trustees and their managing agents have to deal with time and again is the contentious subject of where the sectional title owners’ responsibilities end and where those of the trustees start.  The issue is complicated by trustees also being owners of sectional title units who provide their time and service free of charge.

Firstly, the owner is responsible for the maintenance and cleanliness of the interior of his section.  This includes some items such as the doors and windows, but it does not include the exterior and its maintenance.

Secondly, the owner is also responsible for insuring all movables and content in his section, but the permanent fixtures such as doors and windows are covered by the Body Corporate’s building insurance policy.

There is one exception. If the geyser which serves his section is located outside the unit, as is often the case, it remains the responsibility of the sectional title owner to maintain such a geyser.

Thirdly, the owner has the responsibility for paying the levies.  In some cases, says Bauer, owners renting out their units have assumed that the tenant will pay these – but that is not the case.

Fourth, the owner is responsible for seeing that everyone who lives in or visits his unit – including his tenant and the tenant’s family – complies with the Conduct Rules of the scheme.  It is not, as is often thought, the trustees’ or managing agents’ duty to keep occupants or tenants in line in this matter, says Bauer.  The trustees’ duty is simply to warn the owner if rules are broken and to keep on doing so until he takes action.  The owner, for his part, may after issuing several verbal or written warnings to his tenant, be forced to terminate the lease and in some cases forcefully evict the tenants.

This responsibility of the owner of the sectional title unit, adds Bauer, is particularly important when it comes to exercising the right to use the common property such as gardens, parking areas and swimming baths.  The owner has to see, that his family or his tenants behave appropriately in these areas.

Fifth, a particularly important owner responsibility is to prevent the unit being used unlawfully, ie, for any purpose or in any way that is contrary to the intentions of the scheme’s developers and/or the prescribed Management Rules.  (These intentions are often shown or implied on the sectional plan or defined in the registered rules of the scheme.)  It could, for example, be wrong to run a business from a unit and it would certainly be wrong to sublet space in it on a short-term basis without the permission of the owner.  It would also be wrong to allow the tenant to have more than the prescribed number of occupants (a common and very serious offence) or to use the unit for commercial entertainment.

Sixth, a rule that is often overlooked is that the Body Corporate must be notified by the owner both of changes in ownership and of mortgages relating to the unit.  The owner must also ensure that the Body Corporate is given up-to-date information on the address at which he resides and can be contacted.

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.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za