A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
Should I buy a holiday home?
Australians love to ‘get away’ from home over the summer break. For many of us, it’s as if we don’t feel like we’ve truly closed the chapter on one year and set ourselves up for the next unless we’ve decamped from home for even just a few days.
But that time away by the beach or in the bush can take an unexpected turn, with plenty of holiday makers resolving to buy a holiday home. In an act of breathtaking impulsiveness, some even buy whilst still on holiday.
So towards ensuring considered decision-making, here are the pros and cons of buying a holiday home.
Home-from-home. Buy a holiday property and you have another place you can call home; one that you’ll furnish with the fittings of your liking and, over time, memories of wonderful times. And whilst some pre-trip packing will always be necessary, those with a well-established holiday home needn’t fill the car to over-flowing every time they go away.
Unlimited access. Own a holiday home and you can get away all year round – a fortnight here, a week there, plus several long weekends. Spontaneity is easy. No need to book ahead or worry about peak rate fees.
Earn an income. Many holiday home owners decide to mitigate the holding cost of a holiday home by leasing it out for short term rents. With peak weekly rents for even modest holiday homes reaching four figures, it’s possible to make quite an impact. Moreover, for any period a property is available for lease, owners are able to offset in their tax return any losses due to a gap between net rental income and holding costs.
A place to retire. A holiday home can, in time, morph into the primary residence once the kids leave home and the owners shift from full time to part time work and, eventually retirement. In the ideal scenario, the city home is sold to help fund the retirement lifestyle.
Capital growth. Finally, there is the potential for the property to appreciate in value over the life of the holding.
Reading these pros, you would be forgiven for thinking that a holiday home is a gift that keeps giving. But there are downsides.
They aren’t cheap. They days of finding a cheap holiday home are long gone. Even a modest holiday home within 1 to 2 hours’ drive of a capital city will usually cost several hundred thousand dollars. So to realise the dream, you may have to take on a substantial mortgage.
Empty most of the year. Even the most active users of holiday homes are rarely there for more than a fraction of the year. Unless you are renting out the property at other times, the effective cost of those visits can far exceed the short-term leases for renting a holiday property for the equivalent days.
Lack of variety. Some holiday home owners do get bored with visiting the same place and can feel ‘shackled’ to the property. They feel obliged to visit regularly to justify the holding costs or feel guilt if they don’t reside there.
Leasing downsides. By leasing out a property, an owner can mitigate some of these downsides. But beware of the sacrifices of leasing. You immediately lose some of the initial attractions of the property. You can’t be so happy-go-lucky about how you furnish the place or the state you leave it in after every visit. It needs to be back in tenantable order after every visit you make. You might be fine with that, but it can dilute the holiday home ambience. If you want to earn a reasonable rental income then say goodbye to using the property in the peak seasons of summer and Easter. Further, when doing your calculations about potential income, beware that the costs of short-term leases are much higher than long-term leases. In the first instance, a high turnover of short-term renters subjects a property to much more wear and tear than a traditional lease. Second, managing agent fees can reach up to 20% of rent compared to 8% or so for annual leases.
Sub-investment grade capital growth. Capital growth for holiday homes tends to lag that of good properties in our capital cities. Ultimately demand is far more consistent in our cities and supply more restricted compared to holiday locations. Sure there can be a run of years when impressive hikes in values are recorded, but these are usually offset by lean years. One of the biggest factors holding back holiday properties is that they are usually a discretionary purchase. In weaker economic times they are among the first things to be sold.
For these reasons, if you are buying a property primarily to make money do not buy a holiday home – there are far better options out there. If you are buying for reasons of the heart, good luck to you. But perhaps consider leasing a property for a year in your desired location first. This way, you can test whether you’ll enjoy an area all year round before you commit to a longer term relationship.