Holidays are an idyllic time, when life seems a little less stressful and the world is full of possibilities. If you start daydreaming about owning a holiday home in your favourite destination, you’re not alone. But there’s one question that could snap you out of your reverie: Are holiday homes a good investment?
The answer, of course, is that it depends on a number of factors. Let’s take a look at some considerations for buying a holiday home, and compare the pros and cons.
Location dictates much of a holiday home’s value. The closer it is to attractions like the beach, restaurants, or shops, the higher its value is likely to be. A holiday home in a popular city is also a better bet than one in isolation, where few people visit.
Also look at the home’s immediate surroundings. Is it surrounded by empty lots or other homes? Compare its value with similar homes in the area to get an idea of property prices.
Your Financial Situation
If you can’t afford a holiday home without stretching your budget, it’s probably not a good investment. It can be tempting to jump on a great deal, especially if you’re in the holiday frame of mind. But if you won’t be able to make the repayments, you could be getting yourself into debt without an adequate return.
How do you plan to earn an income on the holiday home? You may want to think twice before assuming that you can rent it out year-round; peak holiday seasons typically only make up eight to ten weeks per year. That leaves 42 to 44 weeks where you might be struggling to get tenants.
If you plan to get a long term tenant, how do you plan to balance that with gaining access to the home for your own holidays? After all, part of the appeal of holiday homes is to use them yourself. Are holiday homes a good investment if you’re not using them? Probably not.
There are also other considerations when renting out a home. How do you plan to advertise for tenants? Through an agency or perhaps by using Airbnb? Remember that these services may charge a service fee for use.
The property will also need to be managed and cleaned between tenants. If you don’t live close enough to do this yourself, you will need to engage someone to take care of it for you. If you do plan to do it yourself, remember that this can be time consuming. Make sure it is realistic before you go forward.
Do Your Research
Look before you leap by investigating rental returns for the area you’re considering. Never assume that a house will rent for a certain amount of money; compare it with others in the area to get a real-world perspective.
If you’ve got the money to buy a holiday home without relying on rental income, you are in a better position to buy. If you’ve determined that you need a minimum number of weeks in rent to make it possible, you could be on shaky ground.
Your intentions will help you determine whether or not a holiday home is a good investment. If you’re looking to rent it out year round, your priorities may be different than if you’re hoping to live in it for part of the year.
You should also consider a home’s layout through a renter’s eyes: does it have parking? Enough bedrooms for a family? A functional kitchen? These are some things to think about when weighing up whether a holiday home is a good investment.
Is the Home Turnkey or a Fixer Upper?
A home’s list price is rarely the full amount you need to budget for. Besides the fees associated with home loans, there’s also the possibility of renovations. A fixer-upper can be great value, but only if you have the time, inclination, and funds to do it up. Otherwise, a turnkey home may be a better investment.
Rates, Water, and Strata Fees
Remember that you’ll be liable for council rates for your holiday home. You may also need to cover utilities and part of the water bill. These costs shouldn’t be outrageous if the home is unoccupied, but they will rise when tenants arrive.
If your holiday home is part of a building or complex you may also have to pay strata fees. These fees contribute to communal features, like building maintenance and management fees.
Be aware of the holiday home’s zoning restrictions before making a purchase. If the home is zoned in a residential area, it may be illegal to rent it out short term. On the other hand, some zoning limitations may mean that a holiday home can only be used for short term rentals!
It can be difficult to sell a home that is only zoned for short term rentals, as it can only appeal to other investors or holidaymakers.
Investors can usually claim a range of tax deductions on investment properties, such as interest paid and property upkeep expenses. A holiday home can be tricky for tax deductions, because its usage is partially personal and partially for business.
You’ll only be able to claim tax deductions for the percentage of expenses that apply to the rental portion of a property. For example, if the home is used for personal use for 25% of the year and rented out for 75% of the year, you’ll be able to claim 75% of the expenses as tax deductions.
Your Home Loan
When asking ‘are holiday homes a good investment?’ you need to consider one very important factor: your home loan. Investor rates tend to be higher than owner-occupier rates, but the one that applies to you will go back to your intentions.
Your lender can help you determine which type of loan will suit your holiday home, but it’s also a good idea to shop around to find a low interest rate.
To find a great value home loan, you can compare rates or request a call here.
Are Holiday Homes a Good Investment?
Signs of a good investment:
- Prime location
- Solid potential rental return
- Zoning permits rentals
- Good layout suitable for families
- Manageable rates and fees
- A place you are likely to use for holiday
- Far from local attractions
- Low rental return in the area
- Restricted zoning can make resale difficult
- Odd layout that doesn’t appeal to rentals
- High council rates or strata fees
- A place you might get tired of visiting