8 reasons holiday homes don’t make profitable property investments

When the weather gets warmer and you start enjoying those longer, lazier days with summer coming up, it’s easy to get caught up in the romance of acquiring a holiday home.

While there’s not necessarily anything wrong with owning a property intended more for vacation fun than financial gain, purchasing a holiday property is usually not a smart property investment.

We love a good holiday home 10043357_l

Aussies adore bricks and mortar and so-called ‘lifestyle’ accommodation is no exception, with around 700,000 holiday rentals owned by one in every 12 households.

Typically located in coastal locations or near inland waterways, it’s not surprising that many of us aspire to own our own little piece of paradise in areas where the watery recreation pursuits we crave as a culture are so prevalent.

Often holiday lets are purchased in areas that hold some personal significance – places where cherished memories have been created and where we already have a strong emotional investment.

But those warm fuzzy feelings elicited by the idea of a holiday home should never be the basis of a real estate investment decision, because it’s too tempting to “make” the numbers work in order to satisfy your own emotional weekend reading relaxneeds.

Some people rationalize the financial outlay of a lifestyle investment by convincing themselves that if they had so much ‘fun in the sun’ at their belovedholiday spot, others will naturally want to do the same.

Their investment will be in high demand, so buying a property in a popular tourist destination makes perfect sense, right?


Fact is there are so many extenuating circumstances surrounding the viability of a holiday let that the likelihood of this representing a thorn in the side of your portfolio, and dragging down its profitability, is very real.

So let’s explore 8 important considerations you need to carefully weigh up when working out if you should buy a holiday home…

1.     Letting and marketing costs can be high

Remember, this is not a long-term rental property so your tenant market is entirely different. gold key house price cost property rent lease buy sell home

Hence, you need to use property managers experienced in short-term accommodation letting who will charge more for their services; in some instances, you’ll pay as much as 20% of the rental.

Then there’s the consistent marketing of your holiday-let investment, which essentially has to happen all year round to be effective as people book their vacations months in advance.

These expenses need to be accounted for in your cashflow calculations.

2.     Rental yields are not always reliable

Given that holidaymakers seek accommodation seasonally, particularly in traditional summer ‘hotspots’, you can never bank on consistent yields when it comes to a lifestyle investment.

This means you need to be financially capable of sustaining the mortgage repayments and associated costs of holding such an asset, independent of the sporadic income it generates.

3.     Maintenance bills can be excessive budget saving cost money poor plan

Renting out holiday accommodation requires your property to be fully furnished and equipped with the necessities, such as cutlery, glassware and crockery.

The nature of this short-term rental market means greater wear and tear will be inflicted on your investment than would normally be the case.

It’s more likely you’ll be footing regular bills for repair works due to a greater risk of accidental damage, and will need to replace furnishings and appliances frequently.

4.     It may create issues with the taxman

One of the many perks property investors enjoy for providing private rental accommodation in this country is negative gearing.

But in some cases, the ATO will only allow you to claim any legitimate deductions associated with your lifestyle investment during periods where it’s tenanted or available for lease.

This means if you use the property for your pleasure, you might only be able to claim a portion of what would usually be fully deductible costs of ownership.

5.     You will most likely want use of the property during peak rental periods

This decreases its income earning potential and in turn, augments holding costs, which in effect cancels out any savings you think you are making on your holidays.

Owning a holiday home doesn’t mean a lifetime of free sabbaticals, because in one way or another you are paying for it. In fact it would probably be cheaper to vacation overseas once a year than own a lifestyle investment!

6.     Do you really want to visit the same place year after year? 36195362_l

This is something you need to really think about.

While it can be nice to have traditionally favoured family vacation spots, the novelty could soon get old.

Consider all the missed opportunities if you feel obligated to return to your holiday let in order to justify ownership, foregoing other new adventures to exotic locations.

7.     It might not live up to expectations

You buy a holiday home with the idea that you’ll enjoy long, lazy summers there with the family.

But if you need it to generate an income in order to continue sustaining all those holding costs, there’s less chance it will be your family enjoying your investment and more likelihood it will be the short term tenants you rely on to generate an income.

8.     You will sacrifice long-term capital gains

Unless you happen to be one of the lucky millionaires who owns a holiday shack in sought after coastal hotspots like Victoria’s Portsea or Sorrento, the chances of that’s you’ll buy a lifestyle property in a location boasting investment grade assets is slim.

I’ve found that most holiday locations rely on one or two seasonal industries to sustain their local economy.

Demand for accommodation is erratic and while it might be in short supply during peak periods, that consistent interest from owner-occupiers (who determine long term growth patterns in property markets) is just not there.

Additionally, spending on holiday home investments tends to be discretionary, meaning they’re more susceptible to the negative effects of any economic downturns.

This makes them less reliable in terms of capital gains and more difficult to offload if you really need to rid yourself of the debt burden.

The bottom line group crowd house invest portfolio property paper

At the end of the day, building a property portfolio is a business proposition, whereas family holidays represent a more emotional investment.

If your aim is to create a viable retirement fund through real estate – which it really should be if you decide to invest in this asset class – then vacation in someone else’s holiday let while you relax, safe in the knowledge that your high-growth property investments are working hard for you.

Also published on Medium.

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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

'8 reasons holiday homes don’t make profitable property investments' have 4 comments

  1. February 4, 2015 @ 7:36 am Simon Roberts

    Hi Michael,
    Yes, agree with your comments. Plus, getting finance for a holiday place can be difficult. Some banks will lend less than 80% of the equity, some as low as 50 or 60% or even not at all unless the place is zoned as able to be used as private residential. This can tie up a lot of your capital. Because of the seasonal variation in rental return, some banks will not use holiday property income when calculating your ability to service any loans. This may further limit your ability to purchase your subsequent property investments. Also, the selling pool is quite limited for holiday properties, so they are likely to be less liquid than residential properties.
    I do own two holiday apartments. My reason for buying was to hedge against a massive future property price rise in my possible retirement location. My investments have been successful to date in that returns have almost doubled in seven years such that the properties are now positively geared and the capital growth has been about 25% in that time. But this is less than the capital return I would have gained from a well chosen residential property and I have put a lot of personal time and effort into these properties and we are very fortunate to have an exceptionally good onsite manager. Our competitors are seeing lower returns and significant drops in their capital values over the same period.
    I would certainly not recommend holiday property as the best long term investment unless you think very carefully about the risks, the pitfalls and your real reasons for purchasing. I would also recommend against buying a holiday property as your first investment property as for the reasons above it may severely limit your future investing ability.


    • February 4, 2015 @ 1:32 pm Michael Yardney

      I understand why you bought your properties Simon

      I look at it differently. Invest in good high growth properties and build a substantial asset base and then the holiday or retirement property you will be able to afford will be significantly bigger and better than the one you could,buy today to secure your future


  2. February 4, 2015 @ 1:11 pm Neryl

    Interesting! I have found my Time-share to be a better way to go. Mine is with Hilton which gives me 8000 different locations and a huge variety of types of holidays worldwide. You still own the property and receive a title deed, and can pass it on to your children etc. but have no maintenance worries, no management worries. You simply book and enjoy and forget about the rest of the time.


    • February 4, 2015 @ 1:28 pm Michael Yardney

      Thanks for your comment, I see your point where your time share may be a great investment in lifestyle and legacy for your children, but in my mind a true investment puts money in your pocket in the form of cash flow or capital growth.
      Keep enjoying your vacations at the Hilton. I’m responding while on vacation at the Hyatt Singapore. I’m paying my nightly room fee and my money is back home working for me


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