It is often this time of year when I get asked on more than 10 occasions by my mother in law what if we invested in a Holiday home?
Both my wife and I live interstate from both of our families, so holidays are generally a time we like to get out of town and spend some time all together, usually up or down the coast at a beachside destination.
It often follows the same pattern.
After a few days of settling into the good life of a morning swim with coffee and some sightseeing with plenty of food and wine it starts…
“Gee, this would be a lovely place to invest in a holiday home! What do you think Brett?”
I can see my father in laws eyes roll as he will do for the next few days on numerous occasions.
I am certain that this is common place in everyone’s family at some stage, especially whilst they are living the good life on holidays.
Just imagine… we could be doing this every weekend!
It could be rented out when we are not using it and we could come here for all the major holidays, Christmas, New Year and public holidays etc.
In reality, it often turns out to be very, very different.
Let me demonstrate why a holiday home makes a very, very poor investment.
99% of the time, these properties are located in secondary locations and have a poor track record for capital growth.
They lack major employment hubs that provide jobs growth and employment that create huge demand for housing.
A simple question – If you had invested say $550,000 in this type of asset, (being generous) it would be lucky to return 3% per annum over the last decade.
But if you had invested that amount into a high growth, blue chip location – a capital city like Melbourne and Sydney and even to a lesser extent in some suburbs in Brisbane, you could have expected a 7% return per annum and your asset would have doubled!
The difference would have been close to $350,000.
I know how hard I work to deserve my holidays and I would want my investments to be doing the same.
I am assuming that most people will need to take out a loan to fund their holiday home, but even if you are not, this is a poor form of passive income.
While there is rarely such a thing as 100% occupancy on any property, rates for short term, holiday accommodation are the lowest.
Don’t be sucked in by guarantees of 70% or more.
You will also find the best and busiest time to maximise your returns on your holiday home will be will be…….
You guessed it! Christmas, holidays and long weekends, the exact time you were planning to be residing in the property and sunning yourself by the pool!
An irregular source in income in any investment or business is definitely something that you should avoid at all costs.
In the short term, if I buy a holiday home, for the next decade or so, 95% of my holidays will be at the same destination.
With the introduction of AirBnB and similar accommodation sites, there has never been a better time to explore and travel to different destinations.
So, take advantage of that, without the hassle of being locked into a mortgage and a holiday home that is not growing in value and providing poor returns.
Instead, use those funds to build yourself a stronger asset base.
Invest in a high growth, blue chip asset where your funds will be working harder and your asset base will be growing significantly faster.
Although the asset may be in a completely different location, call it your “holiday home”.
In a decade or two, you will be in a significantly stronger position financially and you will be able to explore this option once again.
You see the successful and the wealthy focus on growing their assets faster in the short term, so they can live a more comfortable life in the longer term.
Most Australians do it the other way around and that is why the majority do not reach a level of financial independence.
Don’t buy into the hype!
You are at your weakest when you are sunning yourself, full of wine and enjoying rolling beaches, it is not the time to make a serious business decision.
By purchasing a holiday home as an investment, you are basically surrendering yourself to years of poor capital growth.
Not to mention the cash flow can generally be quiet irregular, with the peak times often the time when you are substituting your income for a stronger rental yield.
Instead, invest your money where your assets will grow and create wealth for you faster and leave you in a considerably stronger position in the long run.
Travel, explore and take advantage of cheaper accommodation and other new sites, while your investment property does all the hard work to create wealth for you.
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