Can a holiday home make a good investment?
Australians LOVE a holiday and while overseas travel is high on the list for many, we are blessed with an abundance of holiday destinations in our own backyard. For some of us, when we find a piece of paradise on home turf, the lure of our own holiday hideaway is strong. Which begs the question, have you ever wondered if a holiday home is a good investment?
Q: Is it business or pleasure?
We generally buy lifestyle assets for pleasure, and 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 for your own lifestyle pleasure (and can manage the holding costs of the property over time) that’s great.
However, typically a holiday home may not always be something you would consider as an “investment” – 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;
- Potential property improvements
- Rent-free holidays for you, family or friends any time you like
- Potential profit from holiday rentals
- Even if you don’t make a profit, rental income may offset holding costs, eg loan repayments, rates, insurance, management fees, maintenance
- Possible tax advantages
- Possible capital growth over time
Some people may buy a holiday home earlier in life with a view to retiring in it in the future.
Of course as with any investment it pays to consider possible pitfalls as well.
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 a month and 3 weeks at Christmas it may be cheaper to go and pay normal rental 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. Try and engage a local property manager.
- Potential Income vs Reality: Will you rent it to others? When, how often and what is the potential income? Consider other holiday lettings in the area and how your property compares? Would you forgo personal use to maximise rental income?
- Holding costs: Holding 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 inspection?
- 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 the characteristics that usually 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 tricky – set grounds rules from the start!
Anthony Landahl | Equilibria Finance
This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.
