Purchasing a second home as a capital investment

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One of the main drivers of this phenomenon has been the strong downscaling trend, which has seen many baby-boomers, especially, selling off their big family homes and using the proceeds to finance both a smaller primary home and a second/holiday home.

And it has been most evident in the rising demand for quality homes in the top coastal resorts and other favourite getaway and vacation destinations such as the Vaal Dam, the KZN Midlands, the Trout Triangle in Mpumalanga, Clarens in the Free State, and the Overberg region of the Western Cape.

It has also led to rising prices in many of these areas, with the FNB Holiday Towns House Price Index for the third quarter of 2015 showing year-on-year price growth of 7,2%, and the latest Absa Housing Review showing that some spots along the KwaZulu-Natal and Eastern Cape coasts have achieved increases of up to 30% in the past year.

Inland holiday areas

However, statistics from property data company Lightstone show that home prices in many inland holiday areas are still relatively low, thanks to the fact that it has taken years to absorb the oversupply caused by the 2008/9 market crash.

In the Vaal Marina Holiday Resort, for example, the average home price has almost doubled in the past five years but is still only R950,000, while that in Deneysville is just over R500,000. In Mpumalanga, the average home price in popular Dullstroom is currently R938,000, and that in Belfast R500,000. In Machadodorp, now much favoured by buyers looking for a weekend fishing sport, the average is just R425,000.

In Clarens, a favourite among Gauteng weekenders, there have been several home sales in the R2m to R3m category in the past year, but the average is still R957,000, while in Howick, at the heart of the Midland Meander, the current average freehold home price is R974,000. In Swellendam, an increasingly popular destination for those seeking an Overberg retreat, the average freehold home price is currently around R1.1m.

Fall in demand

What is more, with most households feeling the pinch of higher interest rates and the rising cost of living, all the signs are that overall demand in many holiday towns will fall and that price growth will also fall off quite substantially in the coming year - which will thus be a great time for serious investors to pounce.

However, if you are among them, you will need to research your purchase very thoroughly and also make very sure that you can really afford a second home.

When it comes to location, for example, it is important to ensure that a second home is close to all the amenities or activities you want to enjoy in your leisure time, so check out the local shops, restaurants, nightlife and sports facilities before you buy.

In addition, the best second homes are generally those within relatively easy travelling distance of your primary residence, because if it is too far or too expensive to reach easily, you probably won't use it enough to warrant the purchase as an owner-occupied second home.

If you are looking for capital appreciation, even long-term, you should also take into account that this is typically found in established areas where demand at least equals supply. You should thus avoid heavily marketed, but unproven areas. And if you want to buy in a really popular holiday destination, it's a good idea to wait until the off-season.

Shop around

Next, you should shop around with the help of a reputable mortgage originator for the best deal on a home loan, as many lenders want bigger deposits and charge higher interest rates on loans for second/holiday properties.

You will also need to budget very carefully to ensure that you can really afford two of everything - two home loan repayments, two insurance premiums, two bills for municipal rates and services and two lots of home maintenance costs - as there is no point in killing yourself financially for a holiday home that is supposed to be a place where you and your family can relax.

And finally, you should take into account that you will have to pay capital gains tax on the proceeds if you sell your holiday home, as only primary residences qualify for the current exemption.