Summer is with us and property investment is rising in popularity.
You might think that investing in a holiday rental property right now is a great way to kill two birds with one stone.
But is it?
Making a holiday property a profitable investment takes some careful consideration and planning.
In this article, we give you a guide to getting the best of both worlds!
We’ve all dreamed of a little holiday place where we could get away for a break with family and friends.
And why not combine it with a property investment to make some money?
The problem is, it is very difficult to find one property that can serve both purposes – particularly as a holiday rental earns its biggest income during the periods where you and your friends may want to use it most.
Remember to think with your head, not your heart!
If you’re looking to buy a property for investment purposes, then you need to take two things into consideration – rental income and capital gain.
The rental income needs to be enough to cover your loan and maintenance costs, so that it doesn’t end up costing you money out of your pocket every month.
For capital gain, you need to choose a property that will rise in value over time.
If your favourite holiday destination is also popular with everyone else, it might be difficult to find a property that has the capital gain potential in that location.
However, that doesn’t mean you can’t find a place in an up and coming holiday spot with greater capital gain potential than those you currently frequent.
These are usually locations with great activities for families – swimming, bush walking, water sports and so on.
Research is the key to success here – avoid places that are booming and look for locations with real future growth potential.
It’s important to remember that if you want the property to work as an investment, you’ll need to place profit considerations before your own holiday requirements.
Remember to always think with your head and not your heart in this respect and you could come out on top.
What happens during the off season?
One important thing to remember is that a holiday rental investment is unlikely to provide consistent rental returns all year round.
For example, if the property is near a beach, it may go untenanted during most of the winter.
If it’s near a ski field, just the opposite is true.
To be sure your investment property will be profitable, you need to calculate how much it will earn during the peak seasons to see if it will cover your costs when it is unoccupied.
Before you make your purchase, talk to local real estate agents about how much the property is likely to earn over the year to see if it will be financially viable.
If you plan to use the property for a holiday yourself, think about using it during the off season so that you don’t lose out on rent.
This is something else you should take into consideration when you choose the location – will it offer you what you need when it’s available to you for use?
Many people, particularly those with families, favour holiday rental homes over hotels because they cost less and are much more convenient.
But like hotels, holiday rental homes need to be cleaned and spruced up after every tenant and can pose a lot more problems than regular rentals and property investments in this respect.
Given that your holiday rental property is also likely to be in a destination that’s not close to your home, and needs to be constantly on the market to acquire tenants, then it is likely that you will need help maintaining and managing it.
A good property agent or management company is therefore key to the profitability of a holiday rental investment.
Using the professional services of a good property agent or management company could save you a great deal of time, effort and money.
They will organise website advertising, bookings, cleaning and maintenance.
And you’ll be happy to know that these expenses are usually tax deductible if you are using the property for investment purposes.
Talk to a tax specialist to see exactly what expenses are tax deductible before you make the decision to buy.
However, it should be noted that if you want to use the property yourself, this will reduce your expense tax deductions by the percentage of time that you use it.
You need to take this into consideration when budgeting for your holiday rental purchase.
Financing your holiday investment property
If you are buying a holiday rental property, the conditions of your loan could be different to those of a regular home loan.
The most common difference is the loan to value ratio (LVR), or the percentage the bank is willing to lend you against the value of the property.
The LVR for a loan to purchase a holiday rental may be lower than what is required to purchase a regular home.
This could mean you need a higher deposit than you might need for a regular home loan.
The best way to determine how much of a deposit you need for any holiday rental property you may have in mind is to talk to us early in your decision making process.
We will help you crunch the numbers to see what you can afford and if a property will be a viable financial proposition.
There are a great many loans available today, suitable for investment purposes.
Subscribe & don’t miss a single episode of michael yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to michael yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.