Do Holiday Homes Yield More Memories Than Profits?

Photo Source: realestate.com.au

Summer’s here and it’s tempting in these warmer months to consider making your next investment a holiday home.

Holiday home investments are popular in Australia, with around 700,000 holiday rentals across the country owned by one in every 12 households.

While it may seem like the perfect solution – that lovely place by the sea to enjoy with family and deliver capital growth to boot – investors need to be aware of the common holiday home pitfalls.

• Distance costs  You often don’t live near your holiday home, so you need a property manager experienced in short-term accommodation to look after your investment. This can be expensive, costing as much as 20% of the rental. You also need to factor in the additional costs of listing the property and marketing it as short-term accommodation. 
• Maintenance can be expensive  Holiday houses are usually fully furnished and equipped with items such as cutlery, glassware and crockery. Short-term rentals also suffer greater wear and tear from the constant changeover of tenants. So, you should expect to pay repair bills and replacing furnishings and appliances frequently.
• Income is inconsistent  The demand for holiday homes is seasonal with high demand during peak times, especially over the summer months. This makes rental incomes inconsistent and sometimes hard to predict. You should factor this in to comfortably meet mortgage payments and all other costs, regardless of the rental income and season.
• You’ll want the house for your own holidays  There’s not much point having a holiday home if you don’t get to use it. Every time you stay there however, it decreases your rental income. This means you don’t actually save any money holidaying in your own home. It’s generally considered cheaper to go overseas annually than own a holiday home. 
• Taxman takes a cut  While long-term investment properties can be negatively geared, the rules applying to holiday homes are slightly different. The ATO will generally only allow you to claim any legitimate deductions associated with your holiday property when it is tenanted or available for lease. This means you may only be able to claim a portion of what would usually be fully deductible costs.
• You’ll be stuck with the same scene  Do you love the location enough to spend every holiday there? You may end up feeling obliged to use the home in order to justify owning it, rather than doing what you really want, like going on the overseas trip or luxury cruise.
• Joint ownership can be a headache  People often buy a holiday home with relatives or friends. While this might seem like a good idea at the time, it can cause real problems if things turn sour. Be sure to draw up a contract that deals specifically with how use of the home will be managed, decisions on spending are handled and what will happen if either party decide they need to sell their share of the investment. 

If you go in with your eyes open, there’s nothing wrong with owning a holiday home. Just be aware it should be more about holiday fun more than financial gain. For many people the holiday home is the place where the family comes together and lifelong memories are made. 

If you do decide to invest, make sure your property and you, as a short term landlord, are adequately covered through specialist insurance products like EBM’s RentCover Short Term – a specialist product for short-term accommodation and holiday homes.