Investing in a Holiday Home - What to Expect

When you invest in a holiday property, you risk letting your emotions get the better of you at the expense of your finances. Fortunately, a little wise advice can help your holiday home provide you some income as well as great holidays and hopefully selling your house will never become a necessity.

Some owners love having a holiday home at their disposal and are satisfied if they can make $10,000 and pay the land taxes. Others pull in up to $60,000 a year for a handsome return on their investment, but must remain heavily involved, looking after the home between tenants, providing keys, and so forth. What is most important to you—return or lifestyle?

Rates for short term rentals are certainly superior to long term. A one bedroom in Sydney with an unfurnished return of $400 a week will likely earn $800 weekly as a short term, furnished rental property, minus about 20 percent for the management fee.

However, how often will you be able to pull in top rents? In a metropolitan area you may well get 90 percent occupancy, but in a regional area you may achieve only 20 to 40 percent. Management fees also vary wildly, from 16 percent plus a $90 cleaning fee each rental in Victor Harbor, to up to 50 percent on the Gold Coast.

It’s also important to consider actual cash flow versus high rents. Rental properties may stay empty for weeks at a time, but you’ll still need to pay the mortgage, while maintenance and management costs cut into your gross income and choke your cash flow.

Holiday letting can often be more lucrative than permanent rentals. For instance, a five-bedroom house can bring in as much as $75,000 a year in Lorne, Victoria. This equals a 6.9 percent gross yield, based on the current price of similar homes in Lorne. This is substantially more than the 5.5 percent yield for permanent rentals, according to the July 2009 listing in Australian Property Monitors.

Keep in mind that banks view holiday rental properties as higher risk, so investors may have to contribute a higher deposit. Another crucial aspect is the income tax break. Depreciation benefits and regular tax deductions may be associated with furnishing holiday rentals, depending on strategy. The Tax Office states that deductible property expenses are valid only in relation to the period that tenants actually occupy the property, or it is truly free for commercial rental. Travel costs are likewise deductible for true maintenance, but not personal trips.

Due to capital growth and the phenomena of sea change, owners of holiday homes in certain seaside locations have profited enormously in the past ten years. An idyllic location with a small local population and enough appeal to attract holiday-makers every year may be the key. Holiday homes that previously barely broke even in rental fees have risen in value by hundreds of thousands of dollars in the past ten years.

Even with current, higher purchase prices, there is still growing room in the right locations. Seaside locations will always have the potential for long term capital growth, and some continue to experience healthy price increases even in the current economy. Still, investors must be able to cover costs when seasons are slow. A property in an established city or town inhabitants will provide more reliable ordinary returns than in a remote beach village. In addition, amenities and infrastructure are needed for eventual capital growth.

Even well-known locations currently offer great bargains, such as the Gold Coast. True beachfront properties in older structures are available there for around $300,000, a real steal.

Still, remember that holiday homes are an investment in lifestyle with the goal of long term gain. Body corporate fees and renovation costs can be quite high, and you will need to own the property about ten years to get about 10 percent a year in capital gains. However, that’s better than for general housing, and some properties reap even more.

Independent one or two bedroom properties appeal to more buyers and provide the option of permanent occupancy. However, beware of council zonings. Some complexes do not permit more than three month occupancy, making eventual permanent letting or occupation impossible.

To summarize, you need to be a good marketer and manager of your property in order to reap big gains from a holiday home. If you simply want a place for a weekend getaway in a prime locale, just be ready to shoulder many costs yourself. Either way, with realistic expectations, you can make the best of your holiday home.

Article written and supplied by Anna K. on behalf of Sell My Castle

Anna K. is a journalist from Brisbane, Australia. She writes for several blogs about finance topics such as real estate, insurance and several others which attract attention of many readers.

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