It is not uncommon for those who find themselves in a better financial position than that of their parents to purchase a property on their parents’ behalf. While more affordable to house their parents within their own homes, purchasing a second property will help homeowners build their own wealth as well as assist their family.
“There are several ways homeowners can help their parents who are outside of the property market. While some ways will build wealth for the family, others will simply satisfy a need. Ultimately, homeowners will need to choose whichever option suits their budget and needs,” explains Adrian Goslett.
One option is to purchase a property with an adjoining flatlet in which the homeowners’ parents can stay. This will be far more affordable than purchasing a second property, but it does not offer the same returns as a second home. “Buying a home with a flatlet does eliminate having to pay two sets of rates & taxes and municipal accounts, but it does not compare to the financial returns of owning a second property,” says Goslett.
On the other hand, homeowners who purchase a second property for their parents will acquire an appreciating asset that will generate a substantial return on investment. “Although this option involves far greater costs, the returns will more than make up for it in the long-term if you have purchased wisely. Homeowners will just need to consider that capital gains tax will apply if and when they decide to sell the second property, as exemptions only apply on the first R2 million of any profit made on the sale of the property if it’s the seller’s primary residence,” he says.
The trick is to find the funds to afford this purchase. “In most cases, it is better to pay off your existing loan before considering purchasing a second home. However, homeowners can take out a second home loan. Some banks will even allow homeowners to use the equity in their existing property as an advanced loan to cover some of the costs of the new home, like the transfer and registration fees,” he explains.
For those purchasing a second home, Goslett states that real estate can be a great investment, but only if the homeowner can afford it. “No matter how well-intentioned the purchase, it is never wise to take on more debt than is manageable. It is easy to over-extend oneself when purchasing on behalf of one’s parents. However, it will not stand to benefit anyone if the home is later repossessed. I would rather advise to purchase within ones means, even if all that is affordable is to cover rent on one’s parents’ behalf,” he concludes.