Six reasons not to buy a holiday house as an investment

Ever had that moment when you’re relaxing, looking out over your favourite beach; it’s sunset and you’re filled with a sense of joy and optimism? It’s one of those times when you utter the fateful words: “maybe we should buy a property here”.

We’ve all done it. But before you end up making a decision you could regret later, let’s take a cold, hard look at the reasons why buying a holiday house as an investment is generally not a good idea.

But first, it is important to define what constitutes a ‘holiday’ town.  Holiday towns are areas where the primary economic industry is tourism. They’re typically seasonal, with peak periods, for example, summer on the coast or winter in the snowy mountains.  Signs you’re in a holiday town:

• The permanent population is small
• Major industry is tourism, including holiday parks 
• The area is remote, typically beyond a commutable time to a major employment hub
• Lack of infrastructure such as public transport, medical facilities

Now that the scene is set, we get into the reasons, which, I think you’ll find are compelling enough to rethink an impulse purchase.  

1. Emotion rarely gets you a top investment

Yes you love visiting the area but your own personal tastes may blind you to the reality of the region’s actual worth as an investment. For example, according to Residex, Bawley Point on the NSW South Coast has a forecast growth of 0% in the next 5 years. Although it has beautiful beaches, Bawley Point has a permanent population of just 700 and is located 1.5 hours from thenearest city of Nowra. All property investments need to be solidly backed up with hard data and proven research. You may have found an idyllic house on the coast, but if the area is in decline with no infrastructure, a poor local economy and a waning population this leads to a lack of demand and poor capital growth. Meaning you could be left with a property lemon. 

2. You won’t really be able to use the property to holiday in.

The main reason you purchased a holiday investment was so you could use it. However it’s unlikely you’ll get to do so. This is because the times you’ll want to visit – Christmas, school holidays, summer – is also the peak period when tenants will want to rent it out. Do you keep the place vacant for yourself and then forgo all that sizable rental income? Or does it become a holiday house you only ever visit in winter?

3. Fluctuating rental income

As mentioned above, holiday spots tend to be in demand in certain times of the year. This means you may make a very tidy rental income over the holiday season but may have an empty property for the rest of the year. You also won’t have consistent long term tenants. Instead you’ll have lots of short term tenants which means a high turnover and more property management. Your rental income will also be at the mercy of other holiday spots in the same area so prices may fluctuate depending on demand and competition. 

4. Potentially higher costs and maintenance

Holiday guests demand more from properties than normal tenants. For example, they’ll usually want a home that’s fully furnished. They may also expect features such as barbecues, TVs, DVD players and WiFi. All these are an additional financial burden to establish and to maintain. The more guests you have coming through can mean more wear and tear on all the items.  Which means it can end up being an expensive exercise.

5. Hard to have a long term strategy

As you won’t have consistent tenants this makes it very difficult to have a long term plan. And good property investment is always about plans. If you know that you’re guaranteed a certain yearly rental income from your property then you can strategise for other things; such as building a portfolio or paying off the existing investment.   But if you’re simply going from tenant to tenant that’s not an effective long term strategy, that’s just desperately keeping your head above water.

6. Holiday areas themselves are fickle

People’s attitudes towards holiday areas have changed from twenty years ago where families would be fiercely loyal to the one area and go there every season. Nowadays holiday guests are more adventurous and curious. They are more likely to want to try something different. This means you can’t rely on a hard core group of renters as trends change. Plus, we’re now living in the age of Airbnb and many other internet based rental options. These are very attractive flexible options for holiday guests and only add to the competition.

So, as tempting as it is to buy a property in your favourite tranquil, coastal setting or bush retreat, put on your investor’s hat and do the research first. You will likely be much better off just renting a place yourself a few weeks a year and putting your hard earned cash somewhere else.