Holiday Home Investment

Think First So There Is No Need to Repent At Leisure

March 21 - 22, 2009. Have you been thinking of holiday home investment for a while now? Or perhaps you already have a holiday home and are finding that the costs of running and maintaining this second home are becoming increasingly expensive?

Do we need to put off this purchase, or sell the lifestyle asset, based on the current economic environment? When I speak about lifestyle assets, I mean those assets that we own, or utilize, to enhance our everyday lifestyle, as opposed to those assets that we use on a subsistence basis, such as our residential home.

Prudent investors may wish to consider an alternative to outright ownership, and at the same time take advantage of the relative bargains that are available amongst certain lifestyle assets at present.

An option to consider is syndicating your holiday home investment.

What do we mean by syndication, and how is this different to time share?

Holiday home investment syndication is basically when a group of investors get together to purchase a home (or another asset) and jointly share in the enjoyment, income and expenditure of the asset.

With a timeshare arrangement, you don’t actually own the asset. You are merely purchasing the right to the enjoyment of that asset for a defined period, normally set at a number of weeks per year.

Holiday Home Investment - Let's Look at Basic Costs

Assuming a holiday house will cost R2 million to purchase and furnish, and assuming you take a bond out at prime minus 2%, your repayments are R22,000 a month. Syndicate the property amongst four and your R500,000 bond costs you R5,500 a month.

Those aren’t the only costs to consider though. There are still rates, electricity, water, security and general maintenance that all need to be taken into account.

Is holiday home investment a wise financial decision then?

Obviously circumstances and location dictate, but once you take the monthly and annual maintenance costs into consideration, putting the R2 million into another investment may be a wiser financial decision over time.

You therefore often make a holiday home 'investment' for the lifestyle it affords you, and not the investment returns. With this in mind, you should evaluate the usage you expect to enjoy out of the asset against the price you wish to pay.

Do you intend using the asset every weekend, or just a few times during the year? If it is the latter, creating a syndication around that property could lead to you bearing a fraction of the cost, whilst potentially still enjoying the asset for the same amount of time each year.

What Then Of Your Co-Investors? Syndication Agreement Essentials

You need to ensure that your partners in the holiday home investmtent syndicate share a similar outlook regarding ongoing costs. You don’t want one investor anticipating, and comfortable with, an annual expense of a certain amount, whilst another investor has scrimped and saved to buy into the asset, and then fights any requirement to maintain the asset. This may not only lead to animosity between the investors, but failure to adequately maintain the property may decrease its value over time as well.

It is imperative that a comprehensive agreement is in place to cover issues such as expenses, usage, and entry to and exit from the syndicate. How much can be spent on maintaining the asset without getting approval from all investors? What decisions require a simple majority, and what decisions require unanimous agreement by the investors? What usage are you entitled to, and when? What happens if an investor fails to meet their financial obligations? What remedy is available to the other investors?

There are many options to resolve issues such as a party wanting to exit, or other members wanting to remove a particular party. It is advisable to spend a bit of time and energy up front to ensure that these bases are covered. With significant amounts of money in play, it may be advisable to consult an attorney to help draft this agreement.

It is unrealistic to expect that you will have use of the asset every Christmas holiday, so be reasonable in your expectations, but document it. Take emotion out of the decision making, and avoid management by committee. However, do be mindful of your co-investors, and avoid stamping your authority on a shared asset. Compromise is crucial in a syndicated asset.

Holiday Home Investment with Friends

Although entering a syndicate with friends might seem ideal, it may not be the best idea. Relationships change over time, and may well deteriorate. This is more prevalent when money is involved. Being the best friend is different to being the best co-investor. Look for people with similar values, but different life stages. This could well lead to usage periods that are more suitable to you. You might have school-going kids whilst a co-investor might not. You might prefer going to the holiday house in school holidays, whilst they may prefer utilization outside of school holidays.

It’s highly likely that the purchase of a lifestyle asset will not be the best investment decision you can make, even taking capital appreciation in to account. The cost of maintenance and security is increasing steadily, and it is likely you could achieve a better return elsewhere. However, the purchase of a holiday home can provide lifestyle options that are difficult to quantify in rands and cents.

Syndication is a viable economic option for holiday home investment in the current environment. However, ensure you do your homework correctly, and get an agreement in place that is watertight and that all the co-investors understand and support. You want to avoid investing in haste and repenting at leisure. A properly structured syndication in a lifestyle asset can add significantly to your lifestyle, and can bring years of happiness to you and your family. And besides – it could be a very smart economic decision at this particular point in time.

Netto-Jonker, CFP, is founder of Netto Financial Services and was financial planner of the year in 2001. Her business partner Ian Beere, CA(SA) CFP was the financial planner of the year in 2007.