A common dream among our clients is to one day own a holiday house. When you hear about people who have successfully purchased holiday homes, it sounds like a great way to enjoy making money. Who wouldn’t want to have a property paying itself off while you get to enjoy it from time to time? But is it really a good investment?
You may know someone that purchased a holiday home in a sleepy beachside suburb before it shot up in value and it rents every weekend for hundreds or thousands of dollars. However, for the majority of holiday home owners, the reality is somewhat different. A holiday house can be a large expense and an asset to enjoy rather than to make money out of. Most holiday homes don’t make money, are often in areas that are not as well positioned for long-term growth and may be more susceptible to risk.
To give an alternative perspective on buying a holiday home, imagine you were buying shares in a company on the stock exchange. Typically, your decision to invest would be based on factors such as profitability, price to earnings comparisons, or future growth potential. You would likely not invest hundreds of thousands of dollars because you like using a company’s products. Yet, because property is often an emotional asset, investors will often forget some of the core fundamentals of value and cash flow when purchasing a holiday home.
If you are considering investing into a holiday home, take a step back and consider what it is you’re really trying to achieve. If it’s primarily for enjoyment and you have the means, then go for it. But know it’s a lot of additional cost for a family to support if you’re borrowing for it. If you’ve saved the money and can afford to pay for it outright, you also have to consider the lost opportunities. The additional profit you could possibly make from better investment choices could see you holidaying in Europe or Asia every year, so keep the bigger picture in mind.
If you decide to go ahead, here are some important attributes that you should consider if buying a holiday as an investment:
- Buy what you can afford – This may sound obvious, but the emotional pull of a holiday house could see you breaking the budget. That is going to put you under a lot of financial pressure which will counter any enjoyment you get from it.
- Insist on generating a cash flow through short-term rentals – Get online and check to see what other properties in the area are renting for, and most importantly, check their rental vacancy. There is no point getting excited because people in the area are asking for sky-high rents if no one is actually renting them.
- Budget conservatively – There are many costs associated with running short term accommodation. Make sure you’re aware of all the costs and don’t be overly optimistic when considering the income.
- Research the area – What will drive growth in the area and therefore capital gain on the property? Are there jobs nearby that could see the population grow? Is it an easy commute to either the capital city or a major regional area? Also consider the demographic of the area when renting it out. There is no point in renting out a luxury home if the area attracts mainly backpackers.
- Get a good team around you – Running short-term accommodation if you’re not living in the area is hard work. Make sure you find good, reliable people in the area to help you manage the property and rental aspects on your behalf.
Many people end up either selling their holiday homes because they are either underutilised or end up becoming a financial burden. However it’s also possible to do it well and provide years of pleasure for your family and generations to come. Just make sure you take a step back and consider what you’re really trying to achieve and do your research if you’re buying for investment.
Consistently ranked one of Sydney’s top financial planners (Adviser Ratings), Brenton helps his clients life a great life by making the most of their money. Read his full bio here.
