Holiday home or good investment?

calendar July 10 2018
Can it be both?

Australians LOVE a holiday and overseas travel is high on the list for many of us we are also blessed with an abundance of fabulous holiday destinations in our own backyard.

For some us us, when we find a piece of paradise on home turf the lure of our own holiday hideaway is strong. Be honest! Have you ever checked out real estate prices at your favourite holiday spot?

Have you ever wondered if a holiday home is a good investment? Glad you asked – that’s a really good question…

So what do you need to consider?

Q. Is it business or pleasure?

We generally buy lifestyle assets for pleasure – think nice cars, boasts etc. On the other hand we usually buy financial assets, such as property, with a view to an eventual profit. Even if you never intend to sell your family home it’s generally purchased with an expectation of capital gain.

If you purchase a holiday home purely for your own lifestyle pleasure (and you can manage the holding costs of the property over time) that’s great. However, typically a holiday home is not something you would consider as your first investment – or maybe even your second or third – so seeking good advice is critical. It pays to consider ALL aspects of such a buy.

Q. What should you consider?

Some positive aspects of owning a holiday home may include:

  • Rent-free holidays for you, family or friends any time you like.
  • Potential profit from holiday rentals to others.
  • Even if you don’t make a profit, rental income may offset holiday costs such as maintenance, loan repayments, management fees, insurance and rates.
  • Possible tax advantages.
  • Possible capital growth over time.

    • Some people may buy a holiday home earlier in life with a view to retiring there in the future.

    Of course as with any investment it pays to consider the possible pitfalls as well. We certainly know of many cases where clients have made a purchase in the throes of holiday euphoria only to regret it further down the track.

    Q. What could possibly go wrong?

    Key considerations before proceeding with such a purchase include:

  • Value for money. How often will you use it? If you go there one weekend per month and three weeks at Christmas (ie 43 days pa) it may be cheaper to go and pay normal rates. As of July 2017 travel expenses related to an investment property are also no longer deductible.
  • Security. You may only ‘check’ on a holiday home a few times a year so there could be security issues with an unoccupied property. As a result insurance can often be higher. Make sure you have a local property manager.
  • Potential income vs reality. Will you rent it to others? When, how often and what is the potential income? How many other holiday lettings are in the area? How does your property compare? Would you forgo personal use in peak season to maximize rental income?
  • Holding costs. Ongoing costs include your loan repayments, rates, insurance and maintenance plus possible costs of property management and advertising. You could use local management or manage it yourself. Without a local managing agent how will you manage access to the property, cleaning and post-letting inspections?
  • Capital gains potential. Carefully research property trends – you usually won’t see capital gains like those with a city property. Also holiday homes can be difficult to sell. By their very nature holiday areas usually lack characteristics that underpin a good investment such as infrastructure, arterial roads, hospitals, schools and employment opportunities.
  • Beware of freeloaders! Managing the expectations of friends and family can be a tricky area. Best to set the ground rules right from the beginning.

    • If you are thinking of purchasing a holiday home please contact us for a chat first. We can help you explore all the financial implications for your individual circumstances and long term financial goals.

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