While owning a house on the beach or a secluded cottage in the bush might seem attractive to investors looking to expand their portfolio and at the same time guarantee themselves a prime location when looking to unwind, one property professional has warned of the dangers that can come with buying a holiday home.
For Neil Smoli, managing director of Aviate Group, investors buying a holiday home often fall victim to some of the more basic investment mistakes.
“Holiday home investments are a prime example of a well-worn trap many investors fall into: having too narrow a focus when it comes to searching for the best investment property,” Smoli said.
“Investors are naturally drawn to cities and suburbs they’re familiar with when they’re searching for an investment property. They figure they know the area and this provides a false sense of comfort. A holiday home investment is an extension of this mindset, and one fraught with danger,” he said.
“Confining your search to areas familiar to you is, as an investor, a crucial error. Not only are you unaware of better investment opportunities more appropriate to your means, you also invite concentration risk into the equation.”
In Smoli’s opinion holiday homes carry an increased financial risk for owners, given the fact that rental returns can vary depending on the time of the year and that there is often less chance of quality capital growth.
“Recent market shifts and easing prices might draw investors to select holiday home markets in search of a bargain. There’s a perception that properties in regional markets or holiday destinations are more affordable and less affected by price movements. In fact, the opposite is true,” he said.
“From a capital growth perspective, properties in holiday spots are actually more exposed to price volatility because factors that support suburban housing markets, like infrastructure spend and employment growth, will seldom apply to these markets.”
Smoli isn’t the only one to caution investors looking to buy a holiday home. The Queensland Office of Fair Trading (OFT) also recently issued a reminder about the difficulties they can pose.
“One of the biggest issues potential owners face is not understanding the level of ongoing income and cost involved,” OFT executive director Brian Bauer said.
“Having your own holiday unit to access during the summer holidays could be a great thing for you and your family, but if you’re not renting it out during the peak periods this will significantly alter the income return you can expect from the property,” he added.
Bauer also reminded investors that holiday homes can often come with cost that aren’t typically associated with other investment properties.
“Potential owners need to consider if there are unit complex specific expenses that need to be factored in,” he said.
“From how often you need to upgrade furniture and fittings, to ‘brand’ specific requirements such as the quality of furniture, cleaning contractor costs, or maintaining internet connectivity and cable television, ongoing costs can significantly influence your budget.”
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