Can a holiday home be a good investment?

The warmer weather can make us think about what our next holiday is going to look like. If an investment property is on your radar, you may have considered whether owning a holiday home as your property investment could offer the best of both worlds.

It sounds appealing, on the surface of it, to earn rent for most of the year and then have a few holidays basically for free.

But of course, that’s not really how it works. It’s hard to make a holiday house turn a profit, particularly if you intend to use it too. However, to increase your chances of your holiday house investment being a good financial decision, here are the most important things to consider.

Purchase a property with mainstream appeal

As with all investment property purchases, it’s not about buying where you want to live, it’s about where there is demand from others.¹ Choosing a location that is popular with holidaymakers will help to protect you from high vacancy outside of peak periods. The following elements tend to have broad appeal and make ‘safer’ investments: close to tourist hotspots such as popular beaches or recreation areas (the closer the better); having restaurants, cafes and shops nearby; easy road access.

Make sure you know how rentals work

Rental rates are much higher for holiday homes than for an average investment property, particularly in high season, and this can make your initial investment return look excellent if you don’t consider seasonal fluctuations, potential vacancy and costs.

Seasonal fluctuations

Coastal areas, particularly in the southern states, tend to have a massive peak season over the summer holidays, with much lower demand during the rest of the year. If the property is for you to use as well, you may find that the times when you want to stay there are when demand is high and rental rates are at their peak, so you need to factor this into your planning and/or income.

Prime properties (that is, good proximity to the beach or tourist hotspots, and views) generally generate higher and more stable demand throughout the year, regardless of the season. If you can’t afford a prime property, you may make better returns from a permanent tenant, in which case you may be better off with a ‘normal’ investment property.

Economic implications

Capital growth and vacancy rates for holiday rentals can be inconsistent and tend to be more affected by the economic fluctuations than the average residential property. Property slumps or slow economic periods can mean fewer people taking holidays and fewer people buying holiday properties. While a well-bought holiday home can achieve excellent capital gain, particularly during strong economic periods, it’s more likely that a property in a regional area will take longer to sell and will be affected by more volatile markets.²

Costs

Key costs include property management and/or listing site fees (such as Airbnb or Stayz), insurance, maintenance and replacement costs, damage to property, council rates and utility costs. Tenants of prime properties may also expect extra features such as staples (toilet paper, dishwashing liquid, tea and coffee etc.), air conditioning, BBQs and outdoor tables, wi-fi and access to movie streaming.

Tax implications

Any income you make from your property must be declared at tax time and you typically have to pay capital gains tax when you sell. On the flip side, you can claim tax deductions for expenses (including interest expenses), as well as deprecation, which is higher for holiday rentals (4% for 20 years compared to 2.5% for 40 years).³ However, you will have to meet certain criteria to qualify for tax deductions and show that it is a genuine investment.

Property management

An experienced professional management team with a strong track record can significantly reduce your vacancy rates. You can save on management fees by managing your own property; however, be prepared for the high level of admin and time it requires, and if you don’t have the time or inclination to offer a high level of service, your repeat business may suffer. Most holiday home owners use a listing site such as Airbnb or Stayz, and while these organisations take a percentage of your income, they also allow you to cast a much wider net to potential holiday makers, which should limit vacancies.

The timing

Property investment guru Michael Yardney says holiday homes usually aren’t a good first investment as they are less likely to deliver consistent returns or good capital growth.³

However, there are several unique trends occurring right now that should benefit holiday house investors. For starters, record low interest rates are significantly reducing borrowing costs. Secondly, with international holidays off limits, Australians are holidaying locally, so demand for holiday houses in Australia is currently very strong.⁴ On top of this, as the work-from-home phenomenon continues, we are seeing high demand for property in regional areas, which is pushing up values and the potential for capital gains. For example, NSW regional dwelling prices for the November quarter were up 3.1% and sales volumes were up by 14.2%.⁵

The lifestyle factor

Of course, not all decisions need necessarily be purely financial. Lifestyle benefits such as improved mental, emotional and even physical health are all valid reasons to make a decision, as long as you recognise that these form part of your objectives. It’s a good exercise to compare the annual cost of several holidays per year to the net annual cost of owning a holiday home. This will usually demonstrate that the lifestyle factor needs to be part of your decision-making, as a holiday house investment tends not to be purely for financial benefit.

Nevertheless, according to Yardney, if you are a seasoned investor with income from other properties and you are looking for diversification in your portfolio, with the added bonus of owning a holiday home, you may just be able to achieve the best of both worlds.³

SOURCES: ¹www.resimac.com.au/news/traps-avoid-first-time-holiday-home-investorst, ²www.afr.com/wealth/when-its-worth-buying-a-holiday-house–or-not-20180117-h0jv2ht, ³www.propertyupdate.com.au/buying-a-holiday-home, ⁴www.traveltrends.biz/ttn555-australian-short-term-rental-booking-growth-leads-the-world-in-september, ⁵www.smartpropertyinvestment.com.au/buying/22068-why-holiday-homes-could-make-emotional-and-commercial-sense-in-2021