We all have a favourite spot we love to go on holidays, whether it’s a hidden spot on the coast or somewhere idyllic inland. Whether bush or coast, there’s no question: Australians take our holidays deeply seriously. Let’s face it, we are truly spoilt for choice.
There’s always a moment when you unwind and, over a beer or glass of wine, you gaze out over the gorgeous surrounds and say to your other half, “gosh we really should buy a place here.”
Now, before we go any further and meet your partner’s quizzical eyebrow, let’s freeze on that thought.
It’s one thing to be in love with a wonderful holiday spot for your personal enjoyment. But is it really a good business bet to buy a holiday house? Or are you better off buying an investment property? And are the two really mutually exclusive?
With property there’s often an emotional connection that can be hard to unpick. This comes into play even more so with holiday properties. So let’s look at the pros and cons of holiday houses and investment properties.
You have constant access to a glorious home of your own in a paradise location. Maybe it’s a waterfront on the coast or a remote bush setting. You can drive there on a whim without all the hassle of bookings and organisation and paying the exorbitant high season frees. It’s quality downtime, easily accessible and can you really put a price on that?
It doubles as a property investment in its own right due to its attractiveness as a rental proposition so you get extra income. And if it’s in a very desirable location you can charge more and really reap high income during the peak holiday season.
You should be able to get strong capital growth if you’re in a good location. And, let’s face it, aren’t most holiday homes in good locations?
You can retire into it easily because you already know the property and the area and you’ve set it up to suit your needs. It’s like settling into a comfortable, familiar armchair – with a cracking view.
How often will you really visit it? There’s an old saying about those who own yachts, ‘the two best days of owning a yacht are the day you buy it and the day you sell it’. In other words, the idyll of owing a luxury product is quickly offset by the cold, hard reality of its expenses and maintenance. Logistically, how much time can you really visit it in a calendar year? Consider that you’re working and have limited time to spare, as well as the associated travel time. Say you have a holiday home that you only visit five times a year, maybe you’d be better off just renting something in the same area.
When you’re not visiting, it it’s sitting idle and losing money. Yes you can rent it out but it will mostly be in its best demand during peak holiday seasons, which is presumably when you will want to go there. This leads to the next point…
There’s a disparity in rental income – it can be very high during the peak season but then drop away significantly during off peak. And the peak period is usually only for 3 months tops, over Christmas. It can also wildly fluctuate depending on how close the house is to a beach or other major holiday spot.
Holiday houses usually incur much higher management costs from property managers and more work for what are usually short-term leases. For example, one real estate agent in the hot spot of Noosa admitted that 45 per cent of the standard rent is spent on maintenance, insurances and management of the property plus many other potential hidden fees.
Not to mention, if you rent it out, your things are used by strangers, possibly without sharing the same vested interest in your favourite items as you do, meaning breakages will happen you may need to pack away your special things into a lockable cupboard.
Tax losses: One theory about using holiday homes as an investment property is that you can claim back the losses via negative gearing. However, if the ATO detects that you’re using the house yourself, especially during peak times, then you may be caught out.
As much as we like to think that our chosen holiday spot has high capital growth, this is not always the case. There are examples of the Blue Mountains in the early 2000s and the South Coast of NSW that were, at one point, roaring with growth. However this spike never proved lasting. The fact is simply, that many holiday home areas are like ghost towns. They are inhabited with a high-density population for a few months of the year but the rest of the year lie dormant. This is not an attractive proposition for homebuyers. Who wants to live in a near empty town? Thus this impacts on capital growth.
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If you choose and research wisely, investment properties can offer consistent rental yields for long periods of time in strong capital growth areas.
Every single study shows that Australian property only ever goes up in the long term. So, it’s a slow burn – but a safe, wealth generating burn, given you’ve chosen the right area. This positive cash flow can be used to buy a dream holiday house of your own! Or else more investment properties.
You’re not limited to peak seasons for your rental income but are getting sustained and consistent rent all year round. This is a major benefit that means less stress, more security and additional positive cash flow that you can rely on.
You can get substantial tax breaks if you’ve chosen the right kind of property. For example, if it’s a new build you’ll get reimbursed for yearly depreciation on the property.
The positive cash flow or passive income you receive from property investment means you can build a portfolio. A holiday home is built around short term investments which means trying to create a long term property strategy is very difficult.
Unlike holiday homes, the property management costs are usually cheaper. You shouldn’t have a high turnover of tenants – holiday homes may typically have up to ten different guests per year – whereas you may have one tenant for ten years. This leads to a substantial saving in cleaning, advertising, maintenance, and other property management fees. Plus you have the stability and assurance of a constant revenue stream.
If your property investment is cash positive, you benefit from capital growth, plus money to spend on your annual holiday. Mix it up, who wants to visit the same place every year anyhow?
Choosing the wrong area or wrong property type. Unlike the holiday home you won’t be making an emotional decision. You may not ever see the property you’re buying. So your choice will be based on your own understanding of the market, not on a location you actually like. We’ve written before about the lemming like behaviour of investors who go down the wrong path and fail through basic mistakes.
If your investment is in a really sweet holiday spot, unlike a holiday home, you won’t be able to live in it or enjoy it. You’ll have to live vicariously through the lives of your tenants. And the gorgeous photos uploaded to social media. But … so what? You can still rent a holiday home in the same area and utterly enjoy it without having to worry about maintenance and blocked sinks or dodgy electricals.
This information is provided by DPN Pty Ltd ABN: 94 630 700 186 Australian Credit Licence 514759. DPN Finance Pty Ltd is an authorised credit representative 504129 and related entity of DPN. Credit for Dream Big 100% Offset and Work Smart 100% Offset is provided by Adelaide Bank a division of Bendigo and Adelaide Bank Ltd, ABN 11 068 049 178 and Australian Credit Licence 237879.