As so many Australians are coming out of lockdown, tired of being cooped up, and are heading to well-loved holiday destinations, many who look at buying a rental property often end up buying a holiday home or a holiday apartment while they’re away. And why not? You’ll not only be an investor, but you’re adding some luxury into your life at the same time.
And apart from making your friends and family envious, there are other reasons why you would make this decision instead of just buying a rental property.
Here are just a few:
- Free holiday accommodation whenever you want, for as long as you want
- Rental income whenever you’re not on holidays
- You can leave your things there, so you don’t have to pack as much stuff for your holiday
- The property could go up in value and you could sell later at a profit
- You can claim negative gearing benefits for the time it’s being rented
However, if we were looking at buying a rental property for investment, and somehow end up looking to purchase holiday accommodation, then it would be wise to take a breath and put our business hats on.
In other words, we need to invest logically with our heads, instead of our hearts (and egos).
If you are considering buying a rental property, here are some reasons why we think you should think twice about a holiday home or holiday apartment for investment:
- High outgoings and management fees. Short term or holiday rentals often have management fees of around 15%+ and maintenance can be very high, resulting in a much lower income yield than expected.
- No variety. The romantic notion of a holiday home or apartment may wear off after you’ve been on holidays to the same place year after year. However, because of expense of owning the holiday home (or apartment), you’ll probably feel uncomfortable about going on holidays anywhere else.
- Vacancy rates during off season times can be extremely high and unacceptable to most property investors.
- Wear and tear. This tends to be higher with short term rentals. Furnishings and items need to be replaced more often.
- The chance of a Black Swan Event. Unexpected situations like economic/tourism downturns, cyclones, beach erosion and oil spills (in coastal areas) can negatively impact the investment.
- Lack of Capital Growth. Just because it’s a beautiful holiday spot, doesn’t mean it’s got all the right fundamentals to make it a great investment area. In fact, it can be quite the opposite.
- Volatile sector. Holiday homes are often the first assets offloaded by investors during an economic downturn.
And a couple of important points about holiday apartments and units:
- Many purpose built, serviced holiday apartments have no second purpose. This means they cannot be leased to a standard long-term tenant if needed for a range of factors (like commercial zoning). Therefore, the income (and much of the outgoings) from your investment is at the policy discretion of the assigned on-site operators.
- Banks don’t like these ‘niche’ style properties either. They often give these properties lower valuations and are reluctant to offer finance at standard rates and conditions.
So, when looking at buying a rental property, why are holiday houses and holiday units so popular?
The idea of fully paid accommodation while on holidays seems to be a leading motivation. However, the notion of unlimited free holidays is flawed logic, because you will not be receiving income from the property while you are using it, however your financial outgoings will be constant.
A lot of people justify the decision to buy a holiday home or apartment by saying, “Oh we’ll retire there one day”. While this could be true, can we suggest renting there – perhaps for a year – to find out what the lifestyle is really like?
Retirement lasts a long time and we’d hate to see you make an expensive mistake.
We’ve also seen instances of holiday homes or units being a discretionary purchase while the investor was relaxing on holidays. Logically in this situation we should ask ourselves: “Before I left for this holiday, was I really planning to spend hundreds of thousands of dollars buying a rental property?”. Or another question could be: “Doesn’t this feel a little bit impulsive?”.
A holiday home or apartment can sometimes work out well, especially if you’re a high net worth individual with lots of disposable income. If this is your situation and you recognise that you’re buying purely for lifestyle and leisure, then enjoy your holiday home to the fullest.
But let’s not trick ourselves into thinking that buying a holiday home or holiday unit is likely to be a better investment than buying a rental property in a thriving, dynamic market, offering strong, predictable income week in week out. It rarely is.
If you are thinking about buying a rental property, then investing in a holiday home is a big, long-term financial commitment. It’s important that you fully understand the market, finance implications and range of costs involved before signing on the dotted line.