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Is a Holiday Home a Good Investment?

As we settle back into the grind of a 9-5 work week, complicated by school pickups and kids’ sports, it’s tempting to daydream about that fantastic beach location, where you spent part of January relaxing by the beach.

One thought leads to another, and you may find yourself on a real estate portal pondering ‘what if we had a holiday home there, so we could go whenever we want, and rent it out to create another income stream?’

While the thought of a handy holiday bolthole combined with a steady income source may be tempting, there’s some pros and cons you need to consider before taking the plunge.

First and foremost you need to be sure you can afford to purchase a house, and all the expenses that go with it like mortgage, rates, insurance, maintenance and property management fees. Though you may think the rental income will cover those expenses, let’s take a closer look at all the good things and the bad things.

If you decide to go ahead and buy a holiday home, avoid buying during peak holiday season when prices are likely to be higher. And while you need to be mindful of your budget, you also need to look at it from the perspective on a holiday rental client, who will be looking for sea views and proximity to the beach, which may be more pricey.

PROS TO BUYING A HOLIDAY INVESTMENT PROPERTY

1. Holiday Home on tap without those premium prices – Disappear for a weekend to unwind whenever the mood takes you and relive that wonderful chilled “January feeling” anytime.
2. Be the most popular friend ever – Rent it to friends at a discounted rate, or ask them to recommend your place to their friends.
3. No need to unpack every holiday – Leave kitchen appliances and household items there, ready for your next visit. No more jam packed car trips.
4. Rental Income – Rent it out to other holiday makers for a premium rate – hopefully this will offset all the other costs.
5. Tax benefits – If you rent it out occasionally, you can claim some tax deductions back on your expenses such as property management, interest paid, council and water rates and so on.
6. Possible home to retire to once the time is right – It’s much better to buy now in your idyllic holiday town than in several years when the price may be well beyond your reach.
7. Capital Gain – If you plan to sell it in a few years, the value may be higher, putting profits in your pocket

CONS TO BUYING A HOLIDAY INVESTMENT PROPERTY

1. You could end up out of pocket – If you plan to make your home a holiday rental, bear in mind there’s only about 10 peak weeks per year people rent them, so you need to ensure you are getting enough money in those weeks to cover your outgoings.
2. Finding a tenant in the off season can be difficult – Many renters don’t want the hassle of only being there for only a few months, so if you need a tenant for more than the holiday season, you will need to be strategic in your advertising. Also, if you have a full-time tenant, you lose the benefit of a holiday home to visit whenever you like.
3. Keeping tabs on damage when you aren’t there – Unless you have an awesome property manager, you won’t know if tenants have damaged or vandalised your property, or if repairs are required until you are next there.
4. You may be locked into the same holiday destination until the end of time – You need to really love the location, as the expense of buying a property may prevent you from going to other holiday destinations.
5. Know your tax entitlements – Just because you rent your holiday home out a few months a year or for cash to friends, doesn’t mean you are entitled to claim the same tax deductions as a traditional investment property. You will only be able to claim a proportion of your expenses, based on the number of weeks you were renting or had it legitimately advertised for rent, and only where The ATO website can provide more detail.
6. You will need to invest in traditional advertising to get any tax deductions – You can’t simply rely on colleagues in the office, word of mouth, social media or simply advertising outside of peak holiday periods as the ATO won’t consider it genuine advertising.
7. Property market fluctuations – Often when the economy is soft, holiday homes flood the market, and the property price in these areas declines. If you want to sell in a few years, it is worth checking market performance over the last decade.