Holiday Investing- Should the dream become a reality?
Updated: Aug 16, 2021
As the holiday season enters full swing, we weigh up the pro's and con's of buying a holiday home. With plenty of obviously great reasons, there are a downsides that can come with this type of investing. If you think this could be a future option for you, we give you a few things to consider in your decision making process.
We’ve all been there. You’re on holidays staying in your favourite spot by the beach and thinking how great it would be to buy a place of your own. No more hassle of spending hours trying to find the right spot on accommodation websites, only to find that it’s been snapped up before you get to pay your deposit. (Yes, that price was only the deposit!) Then more worry about whether or not the photos match real life and whether you’re going to find yourselves challenged by insufficient amenities or items that you forgot to pack.
There certainly are plenty of benefits that come with the decision to buy a short-stay investment, such as a place that will become yours without having to pay exorbitant holiday loadings when you want to visit during peak season. If you’re fortunate enough not to need a return on the property to offset mortgage, insurance and maintenance costs, then the decision is an easier one to make. If like most of us, the decision is balanced against the return on investment or potential capital growth, then read on. When it comes to purchasing a holiday rental, the thought process generally starts with taking the time to find something that will suit your needs and then that of those you rent it out to and the decision that gets made, from a financial perspective, will need to be the one that leans more toward the needs of your paying guests- What will guests want by way of room configuration? Amenities? Aspect? Essentially, what will rent most easily and return the most for your budget?
Statistics show there are 1 in 12 Australian’s who own a holiday home, most of which are located in coastal areas. The emotional lure of a simple life, the sea breeze and the ability to come and go as you please is tempting; however, it’s always best to invest with the head and not the heart. We’ve seen examples of investments of this nature that work well and some that don’t so we felt it might be worth pointing out the pro’s, con’s and a few things to consider so that you don’t find yourself considering that the property you do buy in fact feels a lot less like a holiday and more like another day of work.
The Emotional ones
1. You can come and go from a holiday property as you’d like without having to wait for availability.
2. You could furnish the property to your tastes.
3. You have the ability to become a local in the area and get to know others in a way that you and your family will feel more connected to the community.
The Financial Ones
1. You could save money by holidaying in a property that you own.
Understandably if you own the property, you’ll have the ability to walk straight in without feeling it on your back pocket when you leave. Do consider in your budget; however, the cost of cleaning anytime you or your friends/family choose to visit.
2. You could find some tax benefits.
If you can genuinely prove that your property is an investment, if it’s negatively geared (your expenses are more than your income), then you will find that there are possible tax deductions. It’s vital you speak to an accountant before making any decision or weighing up tax implications here.
3. Your Property could increase in value.
You could be fortunate to have the property you choose to go up in value. Properties with a close proximity to the beach can have a higher demand; however, this is also often coupled with a higher purchase price. Consider any capital gains tax or agents fees in the event of a future sale of that property to understand the true financial benefits, and we recommend speaking with an accountant to understand the details of this.
1. Your beloved holiday home may become damaged by your guests.
Hard-wearing renters who don’t have an emotional connection to your property may cause damage, meaning you’ll be less willing to add any personal items.
2. You might not have the luxury of choice.
It is possible that the reality of owning your holiday home still means that you will have to stay at home or holiday elsewhere if you have guests in your holiday home when you would like to be there. That can sometimes mean you don’t have the opportunity to catch up with friends visiting at the same time.
3. You might outgrow the location.
As your family grows and your interests change, it’s possible that you may lose some of the interest in the area you’re enjoying right now.
1. You’ll have peaks and troughs of occupancy throughout the year.
Occupancy rates of holiday rentals sit between 8-10 weeks of the year, depending on the location, so that’s a fairly large remaining gap to fill.
2. It might not make good financial sense to stay in your property if you have guests paying a higher rent.
The understandable way to offset vacancy throughout off-peak times is to place a higher tariff. That could then mean you’ll need to find other accommodation during the best time of year to holiday there.
3. You’re limited to the travel you can do elsewhere.
Because occupancy rates on holiday rentals fluctuate so much throughout the year, it’s important to recoup costs with higher yield periods of the year. That is generally when you’re opting to stay there.
4. There could be a downturn in the market.
Coastal property markets are particularly vulnerable in a market downtown. Holiday homes are the luxury that is moved on in times of hardship, and as we saw during COVID, that happened for many people at the same time causing a drop in demand and therefore a drop in overall property prices.
It could be a worthwhile scenario to map out the holiday budget for the next few years and consider that against all the costs of becoming a holiday property owner.
If you are still hoping to take the plunge into the holiday investment pool, here are a few tips to consider along the way to ensure the investment works as hard for you as possible.
Things to Consider
1. Avoid purchasing your holiday home during peak season. Purchasing during winter months could provide you with greater bargaining power.
2. Ensure you set an extra budget aside for tenants who might damage the property. A standard maintenance budget on a rental property is 4-5% however that can be 15% or higher with a holiday rental that carries multiple tenants during the holiday season.
3. Purchasing the property as an investment will require that you are able to prove to the tax department that your property genuinely is an investment.
4. If you’re purchasing in an apartment complex, consider all body corporate fees. It’s important to ensure that you understand all the costs involved.
For any more information please feel free to give us a call. We're happy to talk you through the holiday home loan process and point out a few other areas to consider. In the meantime, we wish you a very happy holiday!
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