Bliss or burdon? The pros and cons of holiday homes

May 1, 2014

5 May 2014

The extended Easter Anzac period was a great opportunity for Australians to take some time off work and head away on holidays. Whilst enjoying the last of the summer sunshine, many would have been doing the sums on buying a holiday home.

The idea of taking off to your very own holiday house at a moment’s notice is hugely appealing. There is also the option of renting the property out at other times of the year to offset costs. Whilst it seems great at first glance, does this type of investment actually make sense?

One of Australia’s most respected and well known property academics, Peter Koulizos, believes that buying a holiday home as a lifestyle choice may make sense but buying a holiday home as an investment is not such a good decision.

“From a financial point of view, you’re better off buying an investment property instead of a holiday home and using somebody else’s holiday house whenever you feel the need to get away,” says Peter.

“Property in holiday locations can perform very differently to property in capital cities. Prices of holiday homes can increase markedly during an economic and property boom. However, for most of the property cycle, property prices in holiday spots are very subdued and when economic times are particularly slow, prices can fall significantly.”

“In most cases, rental yield will be higher if you rent out your holiday home for 52 weeks of the year at a reasonable rate rather than for eight to 10 weeks of the year at a premium. But if you did this, it wouldn’t be a holiday home anymore! A happy compromise might be to rent out the property whilst you’re not using it.”

Renting out your house when you are not using it will bring the added advantage of deductible expenses such as council rates, water and electricity bills. But keep in mind that you can only claim on a pro rata basis for the time the property is available for rent.

A potential drawback of renting your house is that the best rental returns will be made during the busy holiday periods such as school holidays, Christmas and long weekends, which is exactly when you might like to stay there. You also have to commit time and money to maintaining the property.

If you are set on buying your very own piece of paradise, Peter offers the following tips:

  • Location – If it’s capital growth you’re after, buy as close to the beach as possible. A view is also beneficial.
  • Property type – Older style “beach shacks” are good value for money. They require relatively little maintenance and because the building is old, the value is in the land. The more money you can invest in the land component of the property, the better off you will be.
  • Management fees – Property management fees for holiday homes are much higher than management fees for a typical rental property so factor this into your calculations. Be sure to shop around for a good manager offering services for a fair market price.
  • Insurance – Be sure to include the cost of insurance in your research as holiday homes can attract a higher insurance premium than a typical home or rental property.