Buying a second home: when’s the right time?

Property is a popular vehicle through which middle class South African families, with salaried incomes, can build wealth over time. And, according to our Western Cape Regional Sales Manager, Gustav Zwiegelaar, when compared to other investments types, buying a house or property is a relatively simple way of investing.

I recently caught up with Gustav to find out why he believes this is so. I also asked him for his insights on what he feels homeowners should consider before buying a second home.

Why property is an easy investment

Property has the opportunity to increase in value over time. According to Gustav, a property purchase “starts the process of asset appreciation at a higher base value (than savings do), so that growth is more pronounced”. Additional reasons he gave me for property being a good investment include the property market being such an accessible space in the public domain, and there being fewer hidden costs.

“Information on residential property is widely published and readily available,” says Gustav. “Properties are also actively advertised, and potential investors can physically inspect what is on offer to see whether a property is sound, well maintained and to their liking,” he added.

This means investors have ample opportunity to conduct their own research and understand the dynamics of their investment upfront. These dynamics are relatively simple and logical to understand, and include a property’s location and proximity to amenities, the type of neighbourhood a property is located in, potential tenant profiles, demand, and the potential rental income of that property.

Few hidden costs

When it comes to a property investment, to a large degree, the costs are known upfront. “Things such as rates and levies, maintenance and letting agency fees can be taken into consideration as part of the investment decision,” highlighted Gustav.  He added that, with a correct understanding of the market, and demand and rental income, it is easy to reach an informed decision about investment costs.

“The factors that must be considered prior to making a decision are easily understood and collecting objective information about them is relatively simple. Private individuals may even subscribe to Computer Assisted Valuation (or CAV) sites online, usually at a small subscription fee but well worth it.”

Why invest in a second property?

Unlike first-time home buyers, investors wanting to purchase a second property don’t necessarily have to dip into savings to afford a deposit on a new property.  They can, instead, leverage the equity in their existing property and put this towards buying a second home.

To calculate the existing equity in a property, simply deduct the outstanding balance on your mortgage bond from the market value of your home. The longer you’ve owned a property and the more you’ve paid into your mortgage loan, the more equity you’ll have in your home to use towards a second property purchase.

When to leverage equity

Many homeowners will borrow against the equity in their home to pay off credit cards, car loans or other personal debt. Gustav cautioned, however, that if you don’t have existing equity in your existing property, then it’s not a good idea to purchase a second property.

“Once there is sufficient equity in your property to put towards a second property, you will be in a position to consider investing.”

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What else to do before financing a second property

Gustav advises that you first take stock of your current net worth before financing a second property. This means calculating the total value of your assets minus the total value of your liabilities to see where you stand financially.

According to him, your net worth should represent a reasonable portion of your total assets: “There is no hard and fast rule but, in my opinion, one would want to have a net worth ratio of at least 25% net asset value.”

Needing assistance?

Buying a property is relatively simple way of investing. That being said, it’s always a good idea to surround yourself with the right team to ensure you’re making the best financial decisions possible.

Contact a consultant at SA Home Loans today to find out more about accessing the equity on your home through our home refinancing options.

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