Buying a rental property or holiday house in South Africa

We all have different needs when it comes to investing in an additional property. Some want a tranquil holiday home, perfect for enjoying time with family, while others want to buy another investment property to use for long or short-term rental.

But what are the pros and cons of each decision?

Our panel of experts, which included Keshnie July, Lending Product Owner at Investec, Hayley Ivins-Downes, Managing Executive for Real Estate at Lightstone Property and Tsholofelo Mokoma, Property Practitioner at RE/MAX Horizon, discuss everything you should consider.

Hayley starts by stating that nearly a million of the 6.8 million homeowners in South Africa own more than one property. About 270 000 homeowners own more than two properties. “They could be using the properties for various things, such as a long or short-term rental income, a holiday home or an Airbnb.”

According to Tsholo, affluent buyers are mostly investing in short-term rental and holiday homes. Professionals are getting into the secondary property market as investors. Some enjoy high risk investments and others are very risk averse.

Keshnie comments that the demand for rental properties is quite high. “Tenants prefer lease structures with lower escalations and no deposits. More people are renting as a result of high interest rates, which is making home ownership unattainable or unaffordable.”

Tsholo agrees that there is a lot more comfort in the traditional rental space. “If people are under high economic pressure with strained finances, they generally prefer the stability and predictability of a set monthly rental fee.”

She adds, “It is important for any property owner to have the financial muscle to sustain the property should the worst happen, such as low occupancy rates, interest rate hikes or bad renters.”

Tight household budgets could come under further strain as interest rates stay high. “The risk is that the number of tenants default in their rental payments can begin to increase.” Keshnie cautions investors.

"I think it's really important to establish upfront what you want to do with the second property,” remarks Hayley. “So, if you want to buy a second property to use as an Airbnb, it is ideal to be close to tourist attractions, transportation, shopping centres, the beach etc. For long-term rental for working professionals, the location might need to be close to highways and business hubs.”

South Africa is also at risk for floods and extreme weather. “All that plays a part. I think you should be very mindful and assess the risks, such as floods, wildfires, lightning, hail, etc. This obviously has an enormous impact in terms of insurance.”

With an investment property or second property, there are specific considerations when it comes to personal finance.

“I think it's really important to set a realistic budget,” comments Keshnie. “In addition to a home loan, factor in structural insurance, household insurance, maintenance costs, rates and taxes. It's also important to have an emergency fund for any unforeseen house expenditure, like a burst geyser.”

She adds that your Private Banker can help you with the home loan application, especially in terms of affordability. “If you have a deposit to put against this property, it does weigh in your favour.”

Hayley agrees that it really is about affordability. “Make sure that you've checked your finances and you can really afford that second property. If your tenant or renter defaults, you will have to pay all those monthly costs.”

Keshnie also emphasises the importance for buyers to understand the process, from the home loan application to registration – especially all the costs involved. “Private Bankers are equipped to deal with home loan applications and can assist you every step of the way. They can remove the uncertainty in the process.”

Bad renters can damage your property or you might have to evict a tenant. For these reasons, Tsholo stresses the importance of a legally binding contract. Verbal agreements do not work.

“For the first rental agreement, due diligence must be done. However, in terms of renewals, people are more comfortable with one another and that's where they drop the ball. I dealt with an owner who didn't have an agreement with their tenant of over 18 months who abruptly left overnight.”

So what's the moral of the story? “The moral here is to get your ducks in the row in terms of legal compliance. The second part is to find a property professional when you enter into a rental agreement. We check affordability and do credit checks on potential renters. Once you mitigate at the beginning, you are able to move forward smoothly. When there's a bad renter, you can hand it to the property professional who knows what to do next.”