Should I Buy a Holiday Home?
Welcome to another video in our taking care of business series. In this video we’ll look at the commonly asked question “Should I buy a holiday home?” Then we’ll examine some of the positives and negatives, so that you can make the right decision.
Its fair to say, we all love to get away from home over the summer break and go down to the beach or country. While we’re soaking up the sun, its easy to think to yourself. “Maybe we should buy our own place” After all, the places are brimming with holiday makers, the weather is great, the barbie is fired up and everyone is having fun! And that’s the problem!
Inevitably people act on their impulses and start looking in the windows of local real estate agents, imagining the dream. But BEWARE, this dream could turn out to be the wrong choice!
So, before you take action, lets go through some of the positives and negatives of buying a holiday home. First to the positives;
1. A place to call home — You buy a holiday property and you have another place you can call home one that you can visit whenever you want and spend time with your friends and family and create beautiful memories!
2. Accessibility — You wont have to book ahead or be concerned about peak holiday times and have to pay high rentals. You can come and go whenever you want to and do so at the drop of a hat!
3. Capital growth — There is the potential for the property to go up in value over the long term.
4. Earn a passive income — Many holiday home owners decide to lease out their property to offset the holding costs during times they are not using it. With rents in high season, sometimes reaching four figures, it’s possible to make a healthy income. Also for any time the property is available for rent, the owners are able to offset any losses as negative gearing deductions against their other income, and use these tax savings to help fund the running costs of the property.
Reading these positives, you would be forgiven for thinking that a holiday home is a great idea. But there are some negatives you need to consider;
1. Holiday homes are expensive — The days of finding a cheap holiday home are long gone. Even a modest holiday home within 2 hours drive of a capital city could cost you anywhere from 500,000 to $1m or more. You need to keep in mind, that if you want a place that is comparable in comfort to your own home you may have to take on a substantial mortgage!
2. Poor capital growth — Capital growth for holiday homes tends to be much less than that of properties in our capital cities. This is because demand is more consistent in our cities and supply is more restricted. Also in an economic downturn — when people need money, holiday homes are among the first things to be sold.
3. The vacancy factor — Most users of holiday homes are rarely there for more than a few months of the year. Unless you are renting out the property at other times, the cost of those stays can far exceed the short-term leases for renting a holiday property for the equivalent days.
For example: Lets say you buy a property for $500,000 with an interest rate of 4%. The interest would be $20,000 p.a. and when you add rates, insurance, power and heating, repairs and maintenance, that figure could easily rise up to $30,000 p.a. or $600 p.w. even when you’re not there! When you consider the cost it might be more practical to just rent a place when you need to or consider taking a few overseas holidays instead!
4. Problems with Renting — When you rent out your holiday home, you immediately loose some of the initial attractions of the home. You can’t furnish the place how you would like to, plus it needs to be ready for tenants after every time you visit. Also, if you want to earn rental income then say goodbye to using the property in peak seasons. When doing your numbers about potential income, beware that the costs of short-term rentals are much higher than long-term rentals. This is because a high turnover of short-term renters means much more wear and tear and managing agent fees can reach up to 20% of rent compared to 8% or so for annual renters.
Finally, lack of variety — Some holiday home owners get bored with visiting the same place every time. At first it might seem new and exiting, but once the honeymoon period wears off, things start to get boring and the visits can start to become less frequent.
In summary, if you are buying a property to make money do not buy a holiday home. There are far better options out there. For example; you might consider buying an investment property inner city and renting that out 52 weeks of the year and then using that income to go on holidays wherever and whenever you like. That way you get consistent income, superior capital growth and ultimate flexibility of going on holidays wherever you like!
If however you are buying for reasons of the heart, we recommend you rent a property for 12 months in your desired location first. This way, you can test whether you’ll enjoy an area all year round before you commit to buying your own place.
Until next time…