Coming into school holidays and the warmer months, conversations around buying a holiday house begin to circle once again.
But is it a wise investment to buy a holiday house?
The dual benefit of rental income and a free holiday may seem enticing, but I’d be cautious about buying a holiday house.
I’d even argue that buying a holiday house is not an investment at all, despite what you may think!
You need to make sure you’re purchasing with your head and not just your heart. Although it’s a nice addition to your lifestyle, it’s important to pay close attention to the investment fundamentals.
Consider the following points before diving into the beachside lifestyle…
During the good times, all holiday properties perform well, but in the not so good times, secondary locations may suffer from low occupancy rates.
When selecting a holiday house, it’s important to choose a prime location with views, near the ‘must haves,’ such as restaurants, cafes, shopping centres and tourist hotspots.
Buy in a town or city that has major infrastructure nearby, otherwise you run the risk of fluctuating occupancy rates between peak periods. The best performing beachside locations are within 2.5 hours drive of a major metropolitan area, particularly those with access to a major highway.
How’s the serenity?
Don’t be tempted by areas with a lot of high rise development and fly in visitors. These locations can have large numbers of new units added to a small market in a short period of time, which makes these properties vulnerable during a downturn.
An experienced and professional property manager could make the difference between an empty and occupied holiday house.
The management of a holiday house is vastly different to a standard 12-month residential rental and will usually cost more due to the amount of work required. Every time holidaymakers vacate, its contents need to be rearranged, cleaned, and checked for damage and theft. Then advertised again to attract new potential tenants. These tenants are also higher risk, typically being carefree holidaymakers.
Check your financials
When doing the sums before you commit to buying a holiday houes, you will need to allow for longer vacancy periods and fluctuating occupancy levels from season to season.
If you’re in an apartment complex, higher body corporate and management fees compared to regular developments means holding costs may also be higher than you initially estimated.
And remember that every week you stay in your holiday property is a week’s less rental income you will receive, especially during peak season.
When you do have multiple tenancies in peak holiday periods, you’re likely to have much higher property maintenance costs. You need to budget for the replacement costs for appliances such as fridges and washing machines which break down frequently in hot weather and peak periods.
The annual maintenance cost (excluding body corporate fees if they apply) for holiday properties is often about 4% or 5% of rental income.
Volatile property values
The values of properties in holiday locations tend to be volatile. They boom in the good times and crash in the poor times.
During recessions, property slumps or even just generally quieter economic times, holiday houses are high on the list of expendable assets. They are one of the first things owners will consider selling if they’re going through hardships.
Even in boom times, holiday houses can be difficult to sell compared to suburban residential properties, taking months, if not a year, to sell.
If you own a holiday house you can only claim tax deductions for expenses to the extent the house is rented out or genuinely available for rent. Even if you don’t rent it out, there are capital gains tax implications when you sell it.
If you own a holiday house and don’t rent out the property, you don’t include anything in your tax return until you sell it.
You’ll have to keep records from the time you purchase the property until the time you sell it to be able to work out the capital gain or loss when you sell.
If your holiday house is rented out, the principles that apply to a rental property will also apply to your holiday house.
If you rent out your holiday house, you can claim expenses for the property based on the proportion of the income year it was rented out or was genuinely available for rent.
You have to apportion your expenses between periods of:
- genuine rental
- use for private purposes – such as when you use it yourself or allow your family/friends to use it free of charge
- use by family or friends when you charge less than market rent.
Expenses are only deductible if your holiday house is genuinely available for rent.
Factors that may indicate a property is not genuinely available for rent include:
- it is advertised in ways that limit its exposure to potential tenants. For example, the property is only advertised at your workplace, by word of mouth or outside annual holiday periods when the likelihood of it being rented out is very low
- the location, condition of the property, or accessibility to the property, mean that it’s unlikely tenants will seek to rent it
- you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out – such a setting the rent above the rate of comparable properties in the area or placing a combination of restrictions on renting out the property (requiring prospective tenants to provide references for short holiday stays and having conditions like ‘no children’ and ‘no pets’)
- you refuse to rent out the property to interested people without adequate reasons.
These factors generally indicate the owner doesn’t have a genuine intention to make income from the property and may be reserving it for private use.
If you rent out your holiday house and also use it for private purposes, your expenses are apportioned on a time basis. You cannot claim deductions for the proportion of expenses that relate to the private use.
Private purposes include use by you, your family, your relatives and your friends free of charge.
If your holiday house is rented out to family, relatives or friends below market rates, your deductions for that period are limited to the amount of rent received.
If you rent out your holiday house, you can claim reasonable costs that relate to you inspecting, maintaining and making repairs to the property.
If you’re primarily visiting the property to have a holiday and subsequently undertake repairs and maintenance during this period, you can only claim repair and maintenance costs based on the proportion of the income year the property was rented out or was genuinely available for rent. You cannot claim travel costs to and from the property.
If you’re thinking about buying a holiday house, you may be interested in our 6 Must Reads Before Buying or Selling.