Do you study real estate agency windows every time you’re away from home?
Perhaps it is time to buy a property in a favourite holiday destination?
According to a Roy Morgan survey conducted on a sample of 16,809 Australians between July 2013 and June 2014, one in 40 Australians own holiday homes. That’s more than 560,000 of us.
“Part of the attraction of holiday homes is the potential for strong returns and high occupancy rates, making them a consideration for many looking to take an investment loan, but it’s a decision one shouldn’t take too hastily – you’ll want to mull a few things around,” says Darren Cantor, General Manager of Mortgageport.
Chris Gray, CEO of Your Empire says he always smiles when someone tells him about their holiday home.
“They start the conversation describing how much they enjoy spending time there with friends and family and how beautiful it is,” says the buyers’ agency boss.
“They end the conversation trying to justify to me that it’s actually an investment by explaining how much it rents for in the peak period.”
So can a holiday home be a good investment or is it always an emotional luxury?
Avoid making a regrettable buy in a rush of holiday euphoria by considering the following.
How good is the location?
Buying in one-industry towns – such as tourism – can be a dangerous investment strategy, Gray says.
“If that industry suffers a downturn, everything in that area will be affected and it’s probably the one time that even bricks and mortar can be worth nothing.
“The more industries that support the local community, the more likely your rental income and capital growth will be consistent.”
Cantor agrees that choosing the right area to buy a holiday home investment is essential.
“Picking the right location is not just about finding one that will turn you a profit based on market data,” Cantor says.
“It’s also about choosing one that’s well-placed in relation to a number of useful amenities. For example, a top holiday home choice will be in close proximity to features such as restaurants, shopping centres, tourist spots and, of course, a beautiful view or two. You might also want to choose an area that’s an approximate two-hour drive from a major town or city, or one that’s close to an airport.”
Choose a location that’s well-placed in relation to a number of useful amenities
Michelle Hutchinson, Money Expert at comparison site finder.com.au says a common mistake of property buyers is assuming an area they often holiday in is popular with other Aussies.
“This is not always the case and might make it difficult to rent out,” Hutchinson says.
“It’s always good to choose locations that make suitable holiday escapes, however if you’re buying property you need to focus on the average house and unit prices in the area and the yields you can expect for both. There’s no point looking for an investment on the coast if you’ll be forking out millions and not getting a return.”
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What is the total rental return each year?
Gray recommends buyers calculate the holiday home’s total rental return for a whole year – not just its maximum rent for peak periods.
To get an accurate idea of its investment yield, calculate this rental income as a percentage of the property’s value and after all expenses, Gray says.
“Normal residential long-term rentals get around 4%-6% per year while holiday rentals would ideally get closer to 5%-10% based on the fact income might be more volatile and it costs more to furnish the property, manage and maintain it.”
What is the likely capital growth?
Capital growth in holiday home destinations is often more unpredictable than inner city locations because many of these properties are a discretionary spend for owners.
“When the economy is up, people run out to buy holiday homes and when times are tough, it’s often the first luxury people try and sell,” Gray says. Demand fluctuations impact home values.
It’s really important to consider where we are in the current property cycle
Companies such as CoreLogicRPData produce statistics on the historical growth of holiday areas.
“It’s really important to consider where we are in the current property cycle; are people starting to get into the market or are they still exiting?”
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How long is the peak holiday period?
Is your holiday home located in a popular ski resort area or on the beach? This will decide peak and off-peak seasons. If the area is popular with holidaying singles, will school holidays have little impact on rentals?
Is the area unpopular during wet weather or unseasonal warm spells? Will these fluctuations impact your rental bookings?
“And the really big question is: how much of the peak season will you actually be there,” Gray says.
“To maximize the rental return you ideally want it rented out during as much of the peak season as possible. Now you have to ask yourself, will it be a great holiday home if you can only be there in the off season?”
Will it really be your holiday home?
“Having your own holiday home is certainly a romantic idea with many families going to the same destination for generations,” Gray says.
“But if you decorate your holiday home to your taste, how will that suit singles, families or couples when you’re not there?
“How comfortable are you with strangers sleeping in your bed, and will you be able to fill the house with valuables and family heirlooms? If you choose to decorate it to everyone’s taste and not have any family belongings there, will it really be your holiday home or will it simply become a bland hotel room?”
Who will manage the property?
The property management of a holiday home is very different to a standard 12-month residential rental because it demands more work. Every time holidaymakers vacate, its contents must be rearranged, cleaned, and checked for damage and theft.
“It will usually cost more to oversee and the performance of your holiday home as an investment is very much dependent on how good the property managers are and how they advertise and attract new potential tenants,” Gray says.
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Are you buying as investment or lifestyle?
It is paramount you know the main reason you are shopping for a home in a holiday destination.
As Gray says, there is nothing wrong with buying a holiday home for personal reasons, just as long as you have realistic financial expectations.
“After literally hundreds of conversations with holiday home owners and those considering it, I’ve discovered that the purposes of these properties are about 75% emotional and 25% for investment.
“There are however exceptions to the rule – a number of investors have 100% of their portfolio in unique locations, making a fortune in the process and life isn’t purely about financial return … and there’s nothing wrong with buying an amazing property in a beautiful location and forgetting about whether it pays for itself or not.
“You only live once so enjoy it if you can afford it.”