A Holiday Home as a Real Estate Investment
Is a Holiday Home a Good Real Estate Investment?
Are you looking at a holiday home with real estate investment in mind? When considering the success stories of investment property in South Africa, it is easy to see the appeal of expanding your property portfolio. However, buying a property as a holiday home or investment property is not a decision to be taken lightly.
Whether you are looking to buy holiday homes as rental properties and holiday lettings or even for simple personal use, myriad considerations should go into the value of these properties as an investment. The perennial (and growing) appeal of coastal towns, a second property for semigration and as a second home for spicing up a work-from-home lifestyle, the long game of a holiday rental today and an end point for retirement in the future: weighing up the pros and cons from the outset helps one to go into the decision open-eyed and prepared.
In this blog, the property specialists at Property.CoZa take an in-depth look at holiday homes, when they are a good idea, their value as a real estate investment, and considerations to keep in mind throughout the process.
When is a Holiday Home a Good Investment?
If you are thinking about holiday homes as an investment, you probably have a picture in your mind of a beautiful beach apartment or riverside cottage with an Airbnb listing and a load of earning potential. You may even already own a property with tourism value and are weighing up your options around how to maximise return on investment.
The Value of Where You Live
It is important to remember that there is a value difference between a residential property and holiday lettings. The value you get from dwelling in a property is less easily quantifiable than the calculations that go into arm’s length rental properties. A holiday home for personal use is often a bad investment. To see meaningful investment potential, the property needs to attract income or increase in value to meet inflation – and it is important not to lose touch with this in buying and owning a holiday home as an investment.
When it comes to the value of a holiday home, looking back, these are the factors that will have a bearing on the investment value you will ultimately see:
- Are making unnecessary upgrades to your primary property that could have been better invested in a second property?
- The bond on the property. Was it purchased for cash or what were the terms of the bond used to finance the property?
- What were the initial buying costs on the property?
- What was the interest amount spent over the term of the bond?
- What were the rates, services fees, levies, insurance, and maintenance fees on the property?
- What is the rental income amount earned on the property?
- What were the tax earnings on the property?
South Africa is a Tourism Hub
South Africa is a wonderfully diverse country – with a tourism pull that includes everything from safari and overlanding to incredible beaches, mountains, and a climate that supports a range of exciting activities. Our tourism statistics reflect the popularity of South Africa as a destination, with an all-time high amount of 1.5 million arrivals in January 2018. Forecasts indicate a steady incline in 2022 into 2023.
“We have seen a marked increase in sales in traditional holiday destinations,” says Sandy Walsh, MD Property.CoZa South Africa. For example, according to Lightstone Property, the registrations of full title properties in Ballito had peaked in 2018, dropping off in 2019 and lowering further in 2020. “We have witnessed the resilience of the Ballito market, reflected in the enormous growth in 2021 and the year on year increase in the median property price. This trend is similar in other coastal towns like Knysna in the Garden Route, and Bettys Bay in the Overstrand area, where demand for these holiday homes is driving this market.”
The COVID-19 pandemic has, unsurprisingly, made the past two years difficult on the rental front. On the one hand, it has been reported that there has been a spike in domestic travel bookings and a 294% increase in domestic flights, especially over the holiday period. It would also appear that travellers have coastal towns in their sights, with flight searches to Cape Town increasing by 322% and Durban by 258%.
On the other hand (and within this COVID-19 context), it is important to keep in mind that the method of adjusted prices has been the order of the day for many tourism operations – making local travel more accessible to many South Africans. However, even then, these reduced prices are not affordable to many local travellers. The income that could be derived from these bookings need to be viewed against the reality of inflation and rising operations costs.
Things To Consider Before Buying a Holiday Home
Where is the location of this dream holiday home?
As with any property purchase, the same all-important chorus applies: location, location, location. The earning potential of holiday lettings are directly related to where they are. If you have real estate investment in mind, the quality of the town or city as a tourism destination should be a primary thought.
If you are looking more off the beaten track, understand that traffic may be a little slower and more effort-intensive to advertise and generate awareness through marketing. It is also important to choose a property with broad market appeal – and this can be a hindrance to that.
Ultimately, things like security, accessibility through the transport network, closeness to tourist sites, restaurants, and amenities all form part of the location question – with marketable potential for your property investment, as well as maintained overall value of the property.
If you are looking at a property in a complex or other sectional title property and hope to rent this property out to holidaymakers, find out if this is allowed by the complex or body corporate in question.
Size Matters (Or Does It?)
The size of a holiday rental depends on you. If you are looking for it for your own use down the line, you need to keep your personal needs in mind around space for family, child and pet friendliness, gardens, parking, and the other particulars of your life. If you are buying purely as an investment, a small property in a prime tourism location could yield dividends. It all comes down to matching your aspirations to affordability.
Fixer-Uppers and Maintenance
Take a look at the property giving careful thought to what needs work – and what will need work in future. Where work needs to be done, do the number crunching for affordability and as part of your investment balance sheet. If a property is in a coastal or remote location where regular maintenance is necessary, start looking into this in terms of cost. If there is a garden that requires upkeep, look into the logistics and price of this over time.
If this property is located some distance away from where you are based, factor in who will oversee regular maintenance or react in the event of an emergency.
It’s About What’s On The Inside
When it comes to holiday lettings, the quality of your interiors has a bearing on the rental potential. Tasteful furnishings, lighting, and amenities will all form part of the investment amount – and become strong marketable points for rental properties and holiday cottages. However, the caveat remains not to over-capitalise here, so try to keep it simple and tasteful at the same time.
Back to the Bank
Are you a South African national who is thinking about getting a holiday home? If you are wondering about the process, it is going to be the same as acquiring your first property. This means credit checks and questions around affordability. If you are looking to use a holiday home as a rental-earning real estate investment, most banks do not consider this in determining whether to grant or reject a home loan application. However, without question, these rental amounts could make a personal difference to you in paying off a bond or second bond, as the case may be. It is also important to find out about your second property and Capital Gains Tax upfront before making any decisions.
Are You a Foreigner Looking for Real Estate Investment in South Africa?
If you are looking for property for sale in South Africa, it is important to remember that many banks and finance houses will require a 50% deposit for foreign nationals looking to buy property on a bond.
Holiday Home Help from Property Experts
Unquestionably, whether to buy a holiday home is a decision that requires close scrutiny of your circumstances and projected circumstances. This is so whether you aim to treat this as an investment property or if you’re looking to buy for personal enjoyment. Property.CoZa is home to nationwide experienced property professionals, useful online tools and resources. Visit our website or contact Property.CoZa today.