It’s holiday session again and I'm sure for many out there reading this, the age-old question will inevitably come up while you’re sitting back enjoying your beverage of choice at the end of a lazy day:
Should we buy the family a holiday home or is it better to continue to rent each year?
One thing that’s very important to keep in mind is that if the holiday home is to be considered an investment property, rational thinking and strategic consideration are required.
It's critical that you’re clear on your reason for purchasing. Be very careful when trying to mix the family’s use of a holiday home with the wealth-building requirements of an investment property. It's very rare that the two align!
It seems that when I travel, I always find myself window shopping at the local real estate office. More often than not I end up inside trying to feel out the local market. Easy to do, coffee in hand, the sun is out, and I’ve got a few hours to kill. There I am, strolling along the main street of a popular beachside town, family in tow, and without warning I am drawn like a vortex into the agent’s lair. I know, right?
What did I do when faced with this situation?
Back in 2006, my wife Felicity and I were on holidays with her family down at Apollo bay, which is a neat little town on the south coast of Victoria. After a few weeks of living in board shorts, I'm in full holiday mode.
All it took was a call from some very good friends of ours (who were also in holiday mode) with the idea of buying a couple of blocks close to the beach and golf course in Torquay, another popular seaside town a bit closer to Melbourne. Yeah, I really needed my arm twisted hard on that one!
But then a big and important question sat heavily at the front of my mind: Would this be a good investment decision?
The short answer I told myself was “no”. It's an okay investment, granted, but not a great one when compared to my standard portfolio pick.
That didn’t stop me buying that property in Torquay, and you know what, I've never once regretted the decision. In fact, I would encourage it. Anyone who knows me understands that I value family time above all else. Our kids and their cousins now think of our place at Torquay as a second home. And I'm sure when the kids get older, the house will be a drawcard to keep the family together over future summers. A win-win for all concerned!
Here's the thing: We purchased our place at Torquay based on emotion. We were well aware and happy with this fact. I was aware this property would potentially not meet the growth requirements of our investment portfolio. But we had other properties that gave us the ability to add one that was, unashamedly, just for us.
So, do I encourage buying a holiday home while you’re trying to build your initial portfolio?
Sorry, but no. If you’re buying a holiday home prior to building your initial portfolio, be very aware that this may set your wealth building strategy back many years.
Most holiday homes are regional and therefore have a much slower capital appreciation rate than city properties.
Another important factor to consider before purchasing is that the property may have a high cost to hold. Holding costs for holiday homes are considerably higher than a standard investment property. Agent’s fees to manage the property are anywhere between 15 and 40 per cent of the rental yield. Fifteen per cent is standard. Then you'll need to add the basics: linen service, lawn and garden maintenance, cleaning after each stay, spring cleaning at least twice a year, repairs and the list goes on.
It’s also important that you’re aware there is no tax deduction for the time that you are staying in the property. Don't take any short cuts, the ATO are continually looking to crack down on this.
After talking to a number of agents, it's clear that around a third of the sales that occur in holiday destinations occur just after the peak holiday period. Most holiday homes purchased are therefore impulse buys. As long as you understand this you will start to think somewhat rationally about your purchase.
My advice is to build your portfolio with smart investments and only then go out and buy your family a holiday home once you’re financially able to justify it.
Director of OpenCorp, Cam McLellan is committed to sharing his passion and property investment knowledge with everyday Australians.
Cam started investing in real estate at a young age and quickly mastered the art of building sustainable wealth. He has used the same wealth building strategy to develop a multi-million dollar business, sharing his knowledge and skill with ordinary Australians. Cam has personally bought, sold and developed numerous properties and has an extensive residential and commercial investment portfolio.
Read more Expert Advice from Cam here!
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.