Do Holiday Homes Make Good Investments?
As you head off over the Christmas period, you might find yourself sitting on a beach (or enjoying some other wonderful scenario), and wondering whether holiday homes make good investments.
The short answer is… no, they generally don’t.
Why Holiday Homes Make Poor Investments
Here’s why:
1. Emotional Rather Than Strategic Purchase
The euphoria of a holiday can cause otherwise rational people to make irrational decisions. Instead of being prudent and careful, they fall in love with the lifestyle possibility (fantasy?) and act ‘in the emotional moment’. “Hey honey, guess what I’ve done…”
If you like the area, buy a postcard, not a house!
2. Restricted Usage
How often do you think you’ll actually use the property for your own enjoyment?
Most people only get 4 weeks annual leave a year, and this is often taken during the school holidays periods. Of course, this is also the peak time for holiday rentals, so if you want to maximise your income you won’t be able to use the property when it’s at its best.
3. Locked In
Once you own a holiday home and have the expense of the maintenance and upkeep you may therefore not be inclined or able to afford to go anywhere else. I’ve seen this forced commitment turn into resentment over time.
4. Economics
Rarely are holiday rentals positive cash flow, and so you should expect a constant financial drain (which you can hope to make back on any capital appreciation).
When you divide the total net cost by the number of days you actually use the property, you may find it’s an extremely expensive option.
For instance, say a property loses $10,000 over a year (quite conservative) but you use it for 14 days during the year. That’s a cost of $5,000 a week or $714 a night. For that sort of money you could stay in a six star resort.
Remember you will have to pay a management fee, advertising, rates, insurance, land tax, maintenance, etc.
Also, because the property will need to be cleaned each time it is turned over, you can loose quite a lot of your rent if the property is in use for days rather than weeks.
5. Aggravation
I know a number of people who buy a holiday property thinking they are going to rent it to others, but after the third time someone trashes, damages or steals something they reconsider their appetite for the aggravation.
Also, it is not unusual for family and friends to want ‘mates rates’ to stay (or a freebie), and it can be awkward saying no.
Further to this point, sometimes several family members think about pooling their money and co-owning a holiday property. It’s a nice idea, but in reality this is more likely a recipe for never ending family squabbles about so and so not doing their share, or using it too often, etc.
But If You’re Still Keen To Proceed
If the above points haven’t turned you off the idea, then before you buy something consider these tips:
Tip #1: Straw Hats In Winter: Holiday homes are usually cheaper to buy off-season when there are more sellers than buyers.
Tip #2: Measure Twice; Cut Once: Do all your numbers carefully and have them checked by an independent source. Pay particular attention to the amount you think you can get in rental income in the off-season, and also the budgeted vacancy. Look for the hidden costs.
Tip #3: Financing: Check to see if there are any finance limitations in the area / vacation property type you are planning to buy. You might be surprised, but some lenders are not particularly bullish about lending for holiday homes.
Tip #4: Insurance: Shop your insurance options as holiday homes generally attract higher insurance premiums. Properties in areas prone to bushfires and flooding may be hard to insure.
Tip #5: Inspections: It should go without saying, but make sure you get the property inspected by a properly qualified and experienced person who can identify hazards and defects. Check the water / plumbing / septic in particular, and also for asbestos as older holiday homes can be riddled with it.
Tip #6: Local Conditions: Be sure to talk to lots of locals to get the inside scoop on what areas /streets are considered good and bad, and what changes are on the horizon.
Tip #7: Knowledge Is Power: Search around for a good book or home study course on how to maximise your profits when adopting short-stay accommodation techniques.
Summary
Remember, investing is about making the most money, in the quickest time, for the least risk and lowest aggravation.
All going well, a holiday home might make money, but it is a lifestyle decision first and an investment decision second, and for that reason the decision about whether the pros outweigh the cons can be clouded with emotional bias.
In summary, the average holiday home is certainly an asset – by the payback is via lifestyle benefits from your enjoyment of it, as opposed to being a financial asset owned for purely profit purposes.
Merry Christmas!
– Steve
P.S. Here’s quite a good Christmas joke to round out the year…
One year Father Christmas is forced to have an official from the Aviation Authority check his sleigh to make sure it’s airworthy. The official checks out the sleigh on the ground then sits beside Father Christmas for a test flight. Suddenly Father Christmas notices the official has a revolver in his pocket.
‘What’s that for?’ he asks.
‘You’re not a hijacker are you?’
‘No,’ replies the official.
‘But we have to see how you handle this craft when you lose an engine on take-off.’
Stay safe on the roads, and lock up your reindeer!
Comments
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Well thanks for that Steve, but as an experienced property investor of 40 years and the owner of two holiday investment homes and setting up a third, I have to say you are wrong on all counts. This is one of the most lucrative property investments I’ve seen for a long time, and a rapid growth industry. But by all means keep on bagging the idea, the less competition the better ;)
Cheers Derk
http://www.luxuryholidaygoldcoast.com
Ahhh, nothing like a little free plug, eh Derk? Hope you pick up some extra business.
You don’t seem to have a single holiday home bought in haste, and in conjunction with you main home though, you seem to have turned the concept into a specialised business, exploiting a niche. Good for you.
I’d love for you to help other members exploit any profitable angles to holiday homes, so please (if you’re willing), provide some tips and points of wisdom about pitfalls you have seen others make, and that you can help overcome. Or just food ideas you have profited from.
I’m sure that with over 40 years experience, you’ve seen the good, the bad and the ugly of what works, and what doesn’t.
– Steve
Great post Steve. It was a timely reminder for me as I was only just saying how nice it would be to have a holiday home. Being reminded of the reason we buy property is a good one.
Caroline Vass
Best time to buy a holiday home is when you can afford to buy it out of profits, not debt. Happy Christmas to you and your spunky husband. Steve
Hi Steve, I have had 3 holiday investment properties over the last 10 years. I have to agree and disagree. We made a decision pre GFC on a villa on world heritage listed Fraser Island. It was returning more than 10%, positively geared, ticked all the boxes, until the crash, down hill slide from there with the end result a loss of $150k just to jump ship. Management fees exorbitant, theft (mainly from staff on the island), management had zero accountability. The other two however we manage ourselves. A small coastal village in Victoria. Both positively geared, wonderful guests, wonderful returns, very happy. Perhaps a bit of luck due to good internet resources and attracting high end customers. No trashing, no theft, in fact beautiful gifts, thanks and high return rate with guests. Having city properties also, horses for courses, but what I will say is that coastal properties are more hands on.
Dad owned a unit in Merimbula for many years when we were growing up and we absolutely loved going there. When he sold it, we were all shattered and it’s only recently since I got into property investment did I ask him why he sold up.
He explained that it was yielding about 1.8%! And also how he got wind that the property manager (lived in the complex) was quite dodgey. So dad arranged some friends who were going up to see if they could catch him out and requested they stay in his unit, without telling the manager they knew my father. Sure enough when dad asked the property manager if he had any tenants the answer was NO. Dad was unsure how long this had been going on for, but big chance him and a lot of others would have lost a combined small fortune.
Hu Guys,
I’ve got a holiday property at kingscliff, northern NSW. Best of both worlds, it is 150mtrs from the beach,200 mtrs form all the reasturants / bars / shops etc, approx 750mtrs, has a house permanently rented , wife wouldn’t get an investment at the beach unless she / kids could use it in the school holidays, i wanted a unit development site, lucky for us NSW allows granny flats soooooo we built the granny flat, can use it 365 days a year if we wanted to, all costs are tax deductable as property is let all the time, just need a larger deposit to allow for these differences.
Only downside is that we charge less rent than we could do due to the minor disruption to the tenants, we pay 25% of all the utilities to “pay our way” even though we don’t abuse the privilege of staying all the time.
Think outside the square, mine was that my wife & I wanted the property for different reasons, I had to make it work. We’re both happy
PS imagine if your could manage a similar result at the snow or in other capital cities where you could come & go as you see fit?