During December, many people explore the opportunity of buying a holiday home in their favourite destination. ooba, South Africa’s biggest bond originator and experts in home finance, have listed a few pointers to consider when you are investigating purchasing an investment property.
“Buying a holiday home is a big expense and commitment, and the kinds of things you should consider are very different to your first home,” says Andrea Atkinson, ooba’s Eastern Cape sales manager. “You need to make sure that you know as much about the property and the local market as possible before taking such a big step.”
She suggests asking yourself or your estate agent the following questions:
Why are you buying the property?
It’s important to understand exactly what you are buying the property for, as this will affect the decisions you make.
If you’re looking at it as an investment, you need to be sure that you’ll be able to rent it out and that there is good price growth in the area. If you’re buying it as a family holiday home, be sure that it has the right amenities, and that your children are likely to keep holidaying with you for the foreseeable future. And if you’re looking for a retirement home, make sure that it is the right sort of property for a person or people of advanced years.
“If you are buying for investment purposes, it’s important to separate your own personal tastes from those that will make the property attractive to renters or future buyers,” says Atkinson. “Have a clear notion of what you plan to do with it once you’ve bought it, so that you look for the right sort of property.”
Can you afford it?
Your affordability for a second property is calculated in much the same way as it is for your first, but the banks are likely to be more stringent. They will almost certainly require a significant deposit and will scrutinise your income and expenses closely to be sure that you can afford the monthly bond repayments.
“Most banks are also unlikely to take potential rental income into account when considering your bond application, because they need to be confident that you can afford the property, whether or not it is rented out,” says Atkinson. You can use the calculators at www.ooba.co.za/calculators to work out your budget for buying a second home.
What are the additional costs?
Holiday homes are of course located far away from where you live. This being the case, it is likely that you will have to appoint a letting agent to manage the property on your behalf.
You will need to consider the costs of refurbishment, maintenance, rates, taxes, electricity and water, as well as any levies if the property is an apartment or part of a development. You will also need to research the costs of insurance and security.
Another very important consideration is furniture. Some holiday homes are sold furnished, and you should assess the condition of the equipment and furnishings so that you know exactly what you’ll need to replace and how soon. If the furniture is being itemised and sold separately, banks do not provide bonds on this, so you will have to pay cash for this. And you should obviously also bear in mind the transfer duties and legal fees and include this in your overall return on investment estimate.
“With holiday homes, there are many different expenses that eat into your budget, so do your research carefully and adjust your budget accordingly,” says Atkinson.
What are the tax implications of a second property?
Remember that income from property rental is taxable, so if you are planning on renting your holiday home out, you will have to declare it as part of your earnings. Remember also that when you sell, because it is a second property, your holiday home will be subject to Capital Gains Tax.
“This can be complicated to understand because it takes into account potential future price growth,” says Atkinson. “It’s best to involve an accountant to give you a projection of all matters relating to the tax implications.”
What do you need to know about the property?
As with any other property, you will need to check the building and the roof for any structural damage. Look for damp or weak areas, and any poor finishes that will need replacing.
The seller will be obliged to provide you with an electrical compliance certificate, and, in certain municipalities or areas, a gas compliance certificate, a plumbing certificate and a beetle-free certificate. The beetle-free certificate can be waived by agreement between both parties.
What do you need to know about the value and rental prospects of the property?
Speak to more than one estate agent in the area to find out about local property price growth and rental rates. Find out about how many months out of the year you can expect occupancy – considering as well that you might like to use the property during rental high season.
“You can also assess the going rental rates by searching for similar properties in the area online,” suggests Atkinson.
A holiday home can bring great joy to a family, and if bought with caution and consideration, can be a good investment too. “By informing yourself carefully about every aspect of your purchase, you can set yourself up for a very happy future in your home away from home,” says Atkinson.