There is a saying that states the two happiest moments of owning a holiday home is the day when you buy it and then again the day when you sell it. In this article I will endeavour to cover the investment case and then the softer emotional arguments around buying a holiday home.
From an investment perspective you first need to establish how the property will be funded. Do you intend borrowing the money or do you have the cash on hand. If you intend using your own money then you must calculate the “opportunity” cost or return forgone. The “opportunity” cost of owning a holiday home financed from cash reserves is currently extremely low thanks to depressed interest rates, currently @ 6.5%. If you intend borrowing the money then the cost of financing is much higher, prime is currently @ 9.25%.
Other costs to be considered when buying a holiday home are rates & taxes, insurance, security, municipal services and of course maintenance. This is a real thumb suck but let’s say these costs total +-2.5% of the market value. This would bring your annual cost to 9% if you are using money market funds and 11.75% if you are borrowing the funds. Assuming a house of R 2 mil the annual holiday home cost is between R 180 000 and R 235 000 depending on your method of financing.
If your reason for wanting to buy a holiday home is to have a holiday, would it not better to simply hire a villa in Spain or some other exotic destination? This is where the investment case for buying a holiday home must be factored in. Residential property has appreciated by 1.2% above inflation for the past 30 years, so if we make the assumption that this will occur over the next 30 years then you can deduct 6.5% capital appreciation from the above cost. This reduces the annual cost of your holiday home to between R 50 000 and R 105 000 depending on the method of financing.
Of course I am just playing with numbers. If you intend buying a holiday home you will need to calculate your own costs and potential capital gains. Keep in mind it doesn’t always have to be about the numbers, if you have already ticked the box in respect of retirement and diversification then why not enjoy your money.
The emotional arguments for owing a holiday home are usually centred around quality family time and hassle free getaways. The reality is often very different with children not wanting to join parents, family members abusing privileges and hours spent maintaining and often worrying about the holiday home.
For me, one home is enough, but then again, I like to keep things simple.
Mcomm, CFP®, HdipTax
T. 021-851 3746