Holiday makers relaxing in a picturesque summer paradise can be easily lured by the idea of investing in their own holiday get-away.
Yet they should be aware that such investments are often a trap with more hidden costs and pitfalls than benefits.
Real Estate Buyers Agents Association (REBAA) president Jacque Parker said many investors fall victim to holiday romance and purchase a property on a whim – which they later regret.
“From an investment point of view holiday homes don’t always necessarily make a good buy. Many times they are bought with the heart and not the head.”
Parker said it is necessary to consider the investment merits of any such purchase.
“Look at any initial rental yields, the upkeep - which can be costly especially if in a coastal location - and the costs associated with management fees and regular cleaning which can significantly eat into profits.”
Holiday properties tend to be bought as lifestyle investments in regional areas which don’t always have the same capital growth as city centres, she continued.
“Investors should concentrate on investment opportunities with the potential for higher capital growth and rental yields.”
“If you are looking to buy a holiday home as an ‘investment’ consider your financial position carefully and approach with caution.”
Before investing in a holiday home, Parker suggested thinking about the following:
1. Are you buying at the peak of the market?
Always think about whether a property will generate significant interest in a buyers’ market? If the answer is no, be careful what you pay for it. And remember that the properties that struggle are those which have major flaws or are in more unusual locations.
2. Do you have a buffer of funds to cover unforseen expenses?
Partially leasing to other holiday-makers can incur costs as these tenants can be more hard-wearing than long-term tenants. Maintain an emergency buffer for common items that might require replacement due to increased wear and tear.
3. Have you considered all realistic costs?
Many holiday home buyers forget that a second home incurs a second lot of expenses, including rates, insurance and maintenance. Be realistic and seek professional advice if you are unsure of financial ramifications.
4. Would it be cheaper to holiday-lease yourself?
Consider the long-term benefits of holidaying in the same place on a long- term basis. Would you be financially better off holiday leasing rather than carrying the costs (and potential stress) of a holiday investment?
Washington Brown CEO, and depreciation expert, Tyron Hyde also warned investors to tread carefully before investing in a holiday home.
It is easy to argue that the numbers stack up and it will be a cheap holiday place to visit - and at first glance it might, he said.
“Purchase price, stamp duty and mortgages offset by the rental income can make it look good in the halo of optimism that comes with the first flush of real estate lust.”
The “we have got to have it and we will make it work” compulsion is common with such purchases, Hyde said.
But to maximise returns and save money, he recommended getting advice on depreciation.
5. What’s the story with depreciation?
Holiday houses can be depreciated if rented out to a third party – and that doesn’t mean you can’t stay there when you want to.
If the property is available for rent most of the year you can block out a two week period over Christmas and claim the depreciation pro rata, Hyde said.
“As long as it was available for the full 50 weeks, you are still entitled to that deduction regardless of how many weeks the property is actually rented out.”
It is possible to buy holiday homes at close to, or less than, the construction cost, and - if you furnish your holiday home - you’ll magnify the deductions, he added.
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