Holiday homes: fun, but a flawed idea

2012-01-23 12:24

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.

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  • James - 2012-01-31 11:24

    The feeling of peace and achievemnt you have standing in your owned seaside place and overlooking the Indian ocean cannot be bought elswhere or quantied in moneatary terms!!

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