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Should I Buy a Holiday House?

Posted On: Wednesday, November 2, 2022

Should I Buy a Holiday House?

12 months of bills for one month of fun

Realistically, how much leave do you take every year? Most people only manage a couple of weeks. Even if you’re one of the lucky few who can take more, it’s still unlikely that you’ll spend more than a month on holiday in one calendar cycle. 

But the bills associated with your little slice of paradise will be there all year round. Like it or not, bond payments, rates bills, utilities and maintenance costs for the holiday house will never take a vacation. That’s why it’s important to think of a holiday house as a lifestyle investment (like a yacht or a horse) and not as part of your property portfolio. With that in mind, it makes sense to choose a spot that’s only a short drive away so you can also visit your holiday house on weekends.

Don’t forget the tax implications

A holiday home is a luxury item, and South African tax law sees it as such. The R2-million Capital Gains Tax exclusion on the sale of a primary residence does not apply to the sale of a holiday home. And if you plan to rent it out (more about that later) remember that you can only deduct the interest portion of your mortgage when calculating your expenses. Finally, please don’t buy your holiday home in a Trust since the CGT inclusion rate is 80% compared to 40% for individuals. 

Renting it out is hard work

Lots of people tell themselves they’ll Airbnb their holiday home when they’re not using it. “It’ll pay for itself,” they say. On paper, the logic is sound: renting a holiday home out can be an effective way to cover bond payments, utility bills and maintenance costs.

But it’s important to remember that renting a home out is a job in itself. You’ll have to market your home, manage the bookings, and try to work out which tenants are bona fide families versus those who are secretly planning a massive house party. You’ll also have to spend more on decorating, maintenance, repairs and utilities.

If you’re retired, taking on the job of ‘landlord’ might be an appealing prospect, but if you’re already working a full-time job, it’s probably not the best idea. Of course, it’s possible to employ someone to manage the rental process for you, but that person will also take a cut of the income.

What happens after the honeymoon period?

Buying or building a holiday home is always exciting. For the first couple of years, you and your family (and your distant cousin Barry) will want to visit as often as possible. But as time wears on, you might get bored of swimming at the same beach, playing the same golf course or eating at the same slightly ropey restaurant. If this sounds like you, consider setting the cash aside for escapes to a variety of destinations instead. 

Generally speaking, the most-loved holiday homes are the ones that become focal points for family gatherings. If you already love spending time with your family – and the holiday home isn’t too far away – then buying one might end up being the best lifestyle investment you ever make. 

Are you actually looking for a retirement home?

Many people who buy a holiday home do so because they are craving a more relaxed lifestyle at the beach or in the country. But owning a holiday home, as we’ve just discussed, can actually add to your stress.

If you’re desperate to get away from the rat race, perhaps you’d be better off making a permanent move to the countryside, either by retiring early or by joining the growing band of digital workers. If you decide to go this route, we’d suggest you start off by renting out your city home and finding a rental home in the sticks before you take the plunge and make the move permanent. 

Thanks for the advice, but I still want to buy a holiday home…

If you’ve got the cash to spare, you’ve carefully considered all the potential pitfalls and you still want to invest in a holiday home, then go for it! Now is an excellent time, as the economic uncertainty has forced many people to put their holiday homes on the market.
Whatever you decide to do, please keep us in the loop. We’re not volunteering to stack your braai wood or baboon-proof your windows, but we can definitely help make sure that the financial side of the investment is handled as efficiently as possible.

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