Who hasn’t been on holiday and stopped at the window of the local real estate agent to dream about buying a holiday home to escape the rate race?
Whether it’s a ski chalet, lakeside cabin or an apartment overlooking the beach, the idea of having your own bolthole in a beautiful part of the world is tempting.
To know whether it’s a good idea, you must weigh the expense of a second home – whether paid for outright or with a second loan – against the impact on your cashflow, lifestyle and long-term personal wealth plans.
A holiday home can be a solid, long-term investment. Some of the running costs are tax deductible, such as interest on a loan and maintenance costs. However, it is unwise to make such an investment purely for tax benefit. Many owners of holiday homes will rent out their property, using a local agent, Airbnb or other online services to offset some of the cost of ownership.
To attract a rental market, you must do your research on the types of holiday homes that are popular in the area you are thinking of buying in. Your local real estate agent will be able to provide insights into suitable properties that attract tourists’ interest.
Your location should ideally be no more than three or four hours from a major urban centre, as this is where the majority of your holiday renters are likely to come from.
Another decision is whether you want to manage the rentals yourself, or hand off this responsibility to an agent, who will find renters for a commission and maintain careful eye on the property to ensure it is in good order for the next visitor.
Here, we list some of the pros and cons of owning a holiday home.
The upsides:
- Your holidays are now rent-free, but remember you’ve replaced holiday costs with a mortgage.
- No more stressing to find a suitable destination and property at the time you want it. You’ve got holidays on tap.
- No more paying inflated prices in the peak seasons.
- You can share your holidays more easily with friends at no additional expense.
- Your holiday home is likely to appreciate in value over the long term.
- Rental income will offset the cost of your investment.
- Tax advantages, such as negative gearing and depreciation, are available.
- The property can become your retirement home when the time is right.
- If you are unable to use the property for prolonged periods, you will be able to financially support your investment with a more permanent tenant.
Things to consider
- You and your family are unlikely to visit your holiday home for periods longer than a weekend for more than three or four times year, so weigh up the benefit against the investment.
- A holiday home will likely have an impact on your cashflow. Be aware that many holiday rentals are vacant through much of the year which may mean they are revenue neutral as an investment or struggle to be profitable. Make sure your numbers work on low vacancy.
- Generally, there are more effective ways to get a return on capital than purchasing a holiday home. An inner-city apartment rented full-time is likely to have a stronger return. Holiday investments should be purchased with the long term in mind.
- On-costs are not insubstantial and include council rates, insurances and maintenance. Expect to pay at least 5 per cent of rental income on maintenance. Investment in maintenance is essential, or the property will fall into disrepair and be difficult to rent. While it’s all tax deductible, it can hit your cashflow unless you are able to dip into the equity existing in your loan.
- You’ll need to ensure your holiday home and its contents are secure if it is empty for long periods of time.
- You might tire of returning to the same location for every vacation.
- Be aware that every destination has good and bad years for tourism. The revenue from your holiday house will be affected by these economic swings and roundabouts.
- Be prepared for extra work if you take on the rental management yourself. Customer care is an essential part of being a success on apps such as Airbnb, Bookings.com or HomeAway. On top of that, you’ll have to manage a calendar of occupancy, a Facebook page, even a website, plus handle advertising to drive occupancy. An agent can take care of this for a negotiated rate.