LIKE getting a tattoo and supporting the Border Bulldogs,
buying a holiday home is never going to be a rational decision.
For the past couple of Decembers Wayne Twigg, managing
partner of tax and accounting practice Twigg in Howick, has discussed with
friends buying a holiday home on the KwaZulu-Natal South Coast. “But every year, no
matter how hard we crunch the numbers, it never makes sense.”
According to their calculations, the money that they were
paying on holiday rentals each year would barely cover rates, taxes and security
costs of even a syndicated property.
In the current market, holiday homes are pretty much the VHS
tapes of investments – practically useless. For most people, holiday homes
don’t generate a steady income. When they are in demand for rentals, you want to live there yourself.
It’s a lifestyle
Holiday homes also don’t offer much in the line of capital
appreciation. Property economists don’t expect prices of holiday homes to pick
up in the next couple of years.
Despite low interest rates, consumers are still
overwhelmed by debt, with rocketing municipal levies and electricity costs
making properties less appealing. There is also a glut of properties on the
market due to overdevelopment and stressed sales – particularly by those who
bought in the boom times of easy credit in 2005 and 2006.
Property consultants Rode & Associates CEO Erwin Rode
expects prices to fall (when inflation is taken into account) for the next
couple of years.
First National Bank property strategist John Loos forecasts
real price rises in residential property only after the next interest rate
cycle – when interest rates are lowered again after the central bank finally
decides to hike rates, probably in the last half of the decade. The market for
holiday homes is expected to be the last to recover.
It’s clear that instead of “investing” in a holiday home,
you’ll be much better off buying property unit trusts or an asset which earns a
steady rental income in a metropolitan area.
However, if you do find an absolute bargain - 20% to 30%
less than the market value – because of a stressed sale, you could perhaps
reconsider, says Rode. (After all, even the most irrational among us get it
right sometimes – didn’t Border win the Currie Cup in 1934?)
How to pick a holiday home:
- Choose an
established coastal town where land is limited, says Loos. Hermanus, which is
stuck between the mountains and the sea, is a prime example. Steer clear of
places where there has been rapid property development. Loos says there is a
noticeable oversupply in areas like Jeffreys Bay and on the West Coast,
specifically Langebaan.
- Do your homework.
Go see the local town planner to make sure that everything on the property is
legal – particularly if the house has been extended. Make sure you’re aware of
developments planned for the area, particularly a highway close to your
property. A big red flag should be government-owned unused land next to the
property, which could attract squatting, says Rode.
- Crunch the numbers. Make sure that you can
easily afford it and that the local municipal rates are stable and in line with
those of other areas.
- Consider the
effects of climate change, says Rode. “I wouldn’t buy too close to the sea or a
river.”
- Don’t go it alone.
Consider spreading the cost and the risk by buying a property together with
others. But if you form a legal entity, be mindful of the capital gains tax
consequences, says Twigg. If you sell a holiday home (secondary property) as an
individual, 25% of the gain will be included in your taxable income, resulting in a max of 10% additional tax (40% x 25%). For entities like trusts or
companies, 50% of the gain will be included in taxable income.
- You can deduct
expenses for tax proportionally to the time you try to earn an income from your
holiday home, says Twigg. If you actively market the unit for rental for 10
months but only actually rent it for one, you can claim 10 months’ worth of
expenses (assuming you do not use it personally during that time).
But remember that buying a holiday home is strictly a
“lifestyle investment”, says Loos.
To read more articles on personal finance, go to
www.fintalk.co.za