When mulling over buying a holiday property, think from the mind, not just your heart
If you are one of those holidayers tempted to buy into a property in an area that you’ve vacationed at, well, STOP, for a moment, and come back to reality.
You’re probably one of many investors who kid themselves that they bought a holiday property for financial reasons, when, in reality, the main reason was lifestyle. Most people fall in love with the idea of owning a holiday apartment and few pay much attention to the investment fundamentals.
That’s where this article is going to help you out—first, make sure you are purchasing with your head and not just your heart.
Holiday rentals are usually much higher than those for normal properties and increase even more in peak season. Allow for longer vacancy periods and fluctuating occupancy levels from season to season
Ask yourself: Why am I buying real estate in the first place? What result does this particular property need to produce for me?
If you are looking at buying a holiday property, either to rent out for part of the year or permanently… here are some points to consider before the purchase.
During the good times all holiday properties perform well; but in the not so good times secondary locations may suffer with low occupancy rates, so ensure your property is in a prime location. Choose locations with beach views or near all the ‘must haves’ such as restaurants, shopping centers and tourist hotspots.
✔︎ Understand the rental market
Rental returns can fluctuate for holiday homes. In many coastal spots, the average period of strong demand for holiday rentals is 8 to 10 weeks a year with demand hitting a low point in winter. Demand is more consistent for holiday properties in warmer locations but only for prime properties.
✔︎ Professional management
With management rights of holiday apartments often being sold to recently retired couples or a superannuation payee seeking a job in retirement, ensure the management of the complex you are considering has a strong track record in apartment complex management as well as a comprehensive understanding of the highly competitive holiday accommodation market.
✔︎ Do the math
Holiday rentals are usually much higher than those for normal properties and increase even more in peak season. Allow for longer vacancy periods and fluctuating occupancy levels from season to season. Also, every week you stay in your holiday property is a week’s less rental income you will receive. Budget for 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 corporatefees if they apply) for holiday properties is often about 4% or 5% of rental income. And the cost of property management is higher for holiday properties often in the order of 15 per cent of your rental income.
✔︎ What’s the property value?
The values of properties in holiday locations tend to be volatile—booming in the good times and crashing during recession. But even in the boom, regional properties can take longer to sell than their city properties and even in good times regional and coastal properties generally take longer to sell than their metropolitan counterparts. Look for properties with stability, not volatility.
✔︎ Tax break or not
When you buy a holiday home and rent it out, you must declare the income in your tax return. If you use your property for your own purposes for part of the year and then operate it as an investment property for the rest of the time, you will need to convince the Tax Office that the property is a genuine investment. Unless the holiday home is your main residence, you will most likely have to pay capital gains tax when you sell it or transfer it into someone else’s name. The good news is you get high depreciation allowances on holiday accommodation. To be eligible, your apartment must meet certain criteria including being available for overnight stays and your apartment complex needs to provide a common dining facility.