Before you make the decision to purchase a holiday property as an investment, be sure to question your motives.
Blogger: Chris Gray, CEO, Your Empire
I always smile when someone chats to me 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. 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.
Can a holiday home ever be an investment or will it always be an emotional luxury? Here are some things you need to consider before making a purchase:
What is the total rental return over the whole year?
Rather than justifying a purchase based on the maximum rent you will receive over the summer holidays and New Year’s Eve, calculate the total rental return you’re likely to receive over the whole year. Calculate this as a percentage of the property’s value and after all expenses to get an accurate idea. Normal residential long-term rentals get around four to six per cent per year, while holiday rentals would ideally get closer to five to 10 per cent. This is based on the fact that income might be more volatile and it costs more to furnish the property, manage and maintain it.
What is the likely capital growth?
The capital growth of holiday home destinations is often more unpredictable and unstable than inner-city locations as a high number of these properties purchased are a discretionary spend for people. 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 to sell.
Companies such as RPData, Residex, SQM Research and Australian Property Monitors can provide statistics on the historical growth of the particular area you are looking at. 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?
How long is the peak period?
Different holiday destinations may have different lengths of peak periods where the rental is a maximum, depending on what people do in that area. Is it a winter or summer destination? Do families want to be there around school holidays, or is it a hot spot for singles? You also need to consider how much the climate will affect your property, i.e. will a warm winter with no snow affect a ski resort and will a rainy summer affect a beach destination?
The really big question is: how much of the peak season will you actually be there? 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?
How good is the location?
Investing in areas that are one industry towns can be a dangerous investment strategy. 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.
Who will manage the property?
The property management of a holiday home is very different to a normal 12-month residential rental and is likely to cost much more to oversee. With holiday makers moving in and out every week, it will take more arranging, cleaning and checking that they've left it in good condition and that all your furniture and contents are still there between tenants.
Your holiday home's performance as an investment is very much dependent on how good the property managers are and how they advertise and attract new potential tenants. If you are thinking of setting up your own website and doing it yourself you need to consider the cost and time involved, and ask yourself if the romantic idea of running your holiday home will be the same as the reality when the problems come along.
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. 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?
What are alternatives?
When analysing any decision, especially a financial one, I always look at the alternatives and weigh up the pros and cons. Have you considered investing in a more secure location, where there are more industries and demand supporting the area, and then using this rental income to rent in the holiday destination of your choice? Do you really want to go to the same holiday destination every time, or would you like the flexibility of going somewhere new each time you holiday?
After hundreds of conversations with holiday homeowners and those considering it, I've discovered that the purpose of these properties is around 75 per cent emotional and only 25 per cent for investment. There are, however, exceptions to the rule – a number of investors have 100 per cent of their portfolio in unique locations, making a fortune in the process.
Life isn’t purely about financial return. At some point you have to enjoy the spoils of working hard and enjoy time with family and friends. 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.