To Buy or Rent: Are Holiday Homes Good Property Investments?
For many people out there, holiday season means packing the car to the brim and setting off for your favourite holiday home.
And once you're there, most likely relaxing in the sun, you might think about how great it would be to buy a holiday home. But does it make financial sense to buy or is it better to continue to rent each year?
Firstly, it's very important to be clear on your reason for purchasing and whether you deem the holiday home first and foremost an investment property.
If so, then rational thinking and strategic consideration are required. Be very careful when trying to mix the family's use of a holiday home with the wealth building requirements of an investment property. It's very rare that the two align.
It seems that when I travel, I always find myself window shopping at the local real estate office. More often than not I end up inside sussing out the local market. Slowly strolling along the main street with my family and a few hours to kill, coffee in hand and the sun shining, it's easy to get drawn like a vortex into the agent's lair.
Back in 2006 my wife and I were on holiday with her family down at Apollo Bay, which is a neat little town on the west coast of Victoria.
All it took was a call from some good friends of ours with the idea of buying a couple of blocks close to the beach and a golf course in Torquay. Yeah, I really needed my arm twisted hard on that one!
After scant deliberation, we purchased the place in Torquay. We were aware that our decision was based on emotion and we were happy with this fact. But, in short, this holiday home was not a smart investment decision in comparison to my standard portfolio picks.
I knew that this property would potentially not meet the growth requirements of our portfolio. But we had other properties that gave us the ability to add one that was for us.
From this experience, I wouldn't encourage buying a holiday home if you're trying to build your initial portfolio. Buying a holiday home prior to building your initial portfolio may set your wealth building strategy back for many years.
However, if you have an existing portfolio and can afford to splurge on a less profitable property such as a holiday home, then you can justify it based on the enjoyment you will get from it.
Most holiday homes are regional and therefore have a much slower capital appreciation rate than city properties.
Another important factor to consider prior to purchasing is the property's potential holding costs. Holding costs for holiday homes are considerably higher than a standard investment property. Agents' fees to manage the property are anywhere between 15 and 40 per cent of the rental yield – 15 per cent is standard.
Then you'll need to add the basics. Linen service, lawn and garden maintenance, cleaning after each stay, spring cleaning at least twice a year and running repairs are some of the costs you will need to factor in.
It's also important to note that there's no tax deduction for the time you're staying in the property. Don't take any short cuts. The Tax Office is continually looking to crack down on this.
I've also had the benefit of talking to a number of agents and it's clear that around a third of holiday home sales in holiday destinations occur just after the peak holiday period. Most holiday home purchases are therefore impulse buys, which in itself should help you think somewhat rationally about your purchase.
My final advice is to initially build your portfolio with smart investments. Only once you've established a healthy portfolio and have the financial means to justify it should you think about buying your family a holiday home.
For more information on holiday homes as property investments, check out our holiday homes video or book in a free consultation with one of our professional property investor advisors, who can help discuss wealth building options with you.