How to make a holiday home a smart and rewarding investment 

There has been a lot of positive economic sentiment in South Africa recently. Our inflation is low, interest rates have fallen by a total of 1.5%, economic growth forecasts keep getting upgraded, we have exited the FATF Grey List, and our sovereign credit rating has been upgraded by S&P for the first time in decades.

The tailwind of this economic anticipation may translate into excitement for buying a holiday home during the coming festive season, but that excitement should be tempered with proper investment, financial and tax planning, which may just as well be undertaken well in advance of the coming holiday season.

"Ask the same critical questions you did when buying your primary residence and get involve your financial and tax advisors to make the best investment possible," says Renier Kriek, Managing Director of innovative home loan provider, Sentinel Homes.

Up front, check what matters most to you, whether you've considered all the financial and tax implications, and how you'll cover the upkeep of a property you may only use for a few weeks out of the year. Kriek encourages buyers to review at least the following questions.

Is it a status buy or a lifestyle investment? Don't look for a holiday home at the coast just because everyone else is doing it. Rather, make your personal and family values your starting point. If you are a true veld lover and enjoy quad biking through the bush or hunting game, then buying inland should bring you lasting enjoyment. But if you crave sand, sun and surf, then the coast is the better option. Either way, follow your heart and not the crowd.

Where is the right spot? After deciding what you want, do thorough research to discover the best location for your needs and pocket. Property price inflation in coastal areas has long outpaced inland prices, and so inland options offer much comparative value.

Another strategy for finding a more affordable option is to go slightly off the beaten track, so settling for, say, the cheaper Gansbaai instead of the more expensive Hermanus could pay dividends. Or trout fishing in Emgwenya (Waterval Boven) could be as satisfying as in the pricier Dullstroom.

"And don't forget the basics, like proximity to supplies, local municipality service delivery levels, internet access or load shedding provisions," advises Kriek.

What are the true costs? Apart from financing your new bond, transfer fees and estate agent’s commission, be aware of ongoing costs. These include maintenance and upkeep of the property, as well as security, home insurance, rates and taxes, and other hidden costs. If the property stands unused for most of the year, these can quickly add up – even more so with a coastal home exposed to sea winds and salt corrosion.

Can the property pay for itself? Many holiday homeowners cover their ownership costs by renting the property out themselves or through services like Airbnb. If you plan to do the same, it's essential to confirm that there is enough demand from tourists and holidaymakers for the area and the property type, as well the seasonality of that demand. If it's not all year round, will you have to sacrifice your own holidays to make ends meet and the whole reason you invested in the first place?

Calls for strict regulation of short-term rentals, such as Airbnb, are growing louder because of South Africa’s critical housing supply shortage, and so you should consider whether your target area is vulnerable to this kind of regulation and consider plan B if the short-term letting business becomes regulated. And then there's still tax to consider.

What are the tax implications? If you earn extra income from renting out your holiday home, you will have to register as a provisional taxpayer with SARS. This means paying provisional tax twice each year on that rental income – although this will be offset against your total tax obligation for the year in question.

In that case, it may be sensible to buy the property through a registered company or trust, and you should seek professional guidance from your financial advisor or tax consultant on the best approach. In addition, if you sell the property, it will not enjoy the same R2 million rebate on capital gains tax as your primary residence.

Planning makes perfect While the excitement of owning a holiday home can easily cloud your judgement, especially in an emerging climate of heady economic optimism, it's important to step back and look at the bigger picture through a financial planning lens.

"You'll get much greater long-term value from a property you view as an investment instead of an impulse buy, so think like an investor and you’ll reap the rewards," says Kriek.