10 tips for investing in a leisure property
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, Adrian Goslett, CEO of RE/MAX of Southern Africa warns that it is not a decision to be entered into lightly as investing in property is a long term commitment. 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:
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.
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.
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.
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.
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.
Since you wont 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.
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 4% to 5% of the rental income, and the cost of property management usually comes in at around 15% of your rental income.
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, it is obvious that consumers will tend to focus more on essential primary residential buying, and 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.
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.
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.
Article by: www.remax.co.za