Do holiday homes make good investments?

Holiday homes are typically located on the coast – in popular tourist destinations, in the country, or by many of Australia’s inland rivers and waterways.

Owning a holiday home seems to be the ambition of many Australians, and in fact, one in every twelve households owns one (around 700,000 of them are owned by the 8.18 million households in this country).

The reasons why holiday homes are popular

From a personal perspective, everyone has those special places they visited where they could unwind and relax away from the rat race, enjoy the scenery, trek through the countryside and swim in clear waters. 

These experiences hold special memories for most, especially when kids and family are involved, and so there is a natural desire to want to own those experiences and be able to enjoy them again and again.

From a financial perspective, there is the rationale that if we enjoyed the experience others would too.

Therefore, buying and renting property in popular tourist destinations makes financial sense.

After all, if there’s money to be made renting property to people who want to live in them (tenants), there should be money to be made in renting property to those who want to have fun in them (holidaymakers).

Of course, buying a holiday home as an investment it isn’t quite that simple.

Like any major purchase or investment, you need to do your research first and be absolutely sure it’s the right thing for you before committing.

To help you decide whether you should buy a holiday home, let’s weigh up the positives and negatives associated with this type of investment.

Pros

• Unlimited Access - A big advantage is you can have unlimited access to the property and you can visit whenever you like.
  This reduces the amount of forward planning needed and allows spontaneity for those spur of the moment trips.

• Family and Friends Benefit - A holiday home could be used by close family and friends as a place everyone can come together in a fun and safe environment.
  They are often a great place to bring the family closer together while giving them their own space, especially for older kids.

• Second Home - If you use the property a lot you may be able to turn it into your second home.
  You can include your own comforts, personal taste and lifestyle needs.
  Another plus is that it should cut down on your packing since most of what you need is already there.

• Offset Costs - As with any investment property, you can offset holding and borrowing costs with rental income.
  If you buy wisely you could enjoy some good capital growth when it comes time to sell.

• Place for Retirement - If the location is somewhere you enjoy and it has everything you need, it could be a an ideal place to retire.
  At the very least you’ll be familiar with the property, its location and your neighbours.
  These are big benefits when you’re looking to make that permanent sea change or tree change.

Cons

• High Holding and Marketing Costs - Holding and marketing costs can be high. Apart from borrowing costs, expenses such as public liability insurance, short stay insurance, advertising, property management costs (which can be as high as 20% of the rental for short stay leases) and maintenance and cleaning costs (which will be higher for high turnover properties) may be associated with holiday rentals. All of these costs combined can take a large chunk out of your rental income. 

• Seasonality - Rental yields can vary depending on seasonal factors and the level of competition in the area.
  During extended periods of vacancy, the level of rent may fall short of expectations and place the property’s financial viability under pressure.

• Greater Risk of Damage - There is a greater risk of damage and theft to the property.
  Things like parties and kids can and do cause problems that might result in major repairs, which could in turn lead to the property being taken off the market while it is being repaired.

• Higher Vacancy Rates- Holding costs of the property increase when it is in a period of vacancy or when it is being used privately because there is no offsetting rental income.
  This increases the cost of each of your visits, meaning it might end up being cheaper going somewhere else or even travelling overseas.
  It is important to remember that owning a holiday home is not the same as a free holiday – one way or another you are paying for it.

• Negative Gearing Traps - If you buy on the basis of negative gearing, beware. The tax office may limit the deductibility of certain expenses to only those periods when the property is available for rent. This means you might only be able to claim a proportion of the otherwise fully deductible costs of ownership. 

• Lack of Variety - A major problem could be lack of variety. After a while, you might get sick of going back to the same place every year, and you may feel obliged to visit to justify the cost.
  In the long run, this will reduce your enjoyment and may preclude you from experiencing new sights, sounds and adventures by travelling more widely.

• Reduced Access - Renting the property out will impact on the benefits of ownership. For instance, you might not get access to your property when you want (especially during popular periods) because it is tenanted. You may have to forgo visits in favour of renters in order ensure adequate rental income, and you may need to limit the types of personal belongings left at the property due to health and safety, wear and tear and theft issues.

• Lower Capital Growth - Finally, you may not get the capital growth you want. Holiday homes tend to reflect discretionary spending, meaning they are more susceptible during periods of economic downturn. Additionally, values tend to be more volatile so prices can drop more deeply than those in capital city and metropolitan areas.
  This can make them harder to offload when times are tough or you want a quick sale.

Just like any other property investment, you should always act with your head and leave the emotion out of your purchase.

However, this is probably easier said than done when it comes to holiday homes because more often than not this type of investment property is bought for emotional reasons rather than financial ones.

ALSO READ: 7 Tips for Buying a Holiday Home in Australia

About Peter Boehm Peter Boehm was the Finance Editor for Onthehouse.com.au. & has more than 30 years' experience in banking and financial services - Visit https://www.onthehouse.com.au/