Picture the scene.
The hustle and bustle of Christmas and the new year is over and you’ve just arrived at your favourite seaside town for a week away with friends and family. You’re looking forward to relaxing by the ocean, strolling down the main street with an ice cream and generally enjoying the carefree existence for the time you’ve earned during the exhausting year before.
As you walk down the street you happen to notice the local real estate agent’s office has some listings in the window and find yourself taking the emotional trip down the path of purchasing a holiday home in this place that you love so much – then you’d be able to enjoy this all the time! Endorphins are running high and you walk into the office to chat with the agent. Before you know it, you’ve signed on the dotted line and bought a holiday house!
So why did you do it?
This scenario is very common and unfortunately forms one of the mistakes that people make when looking to start or grow their property portfolio. The underlying reason for this is that generally, you should never mix purchasing for investment and pleasure. We’re not saying don’t buy a holiday house! If you’re cashed up, have minimal personal debt and everything is under control with regard to your financial future then it can obviously be a great way to enjoy the fruits of your labour. However, the majority of people cite the reason that they bought a holiday house was a mixture of investment and personal use. If that’s your motivation, here are some reasons why it’s not a good idea:
1. Local area growth performance – Generally speaking, people buy holiday houses in areas that are just that – holiday areas. More often than not, these areas consist of smaller towns that do not contain the consistent drivers for growth that will cause a property to increase in value over time. Things such as employment, infrastructure, income growth and supply constraints. They can be attractive areas for retirees where people are always looking to downsize, have fixed incomes and form a large part of the demographic.
2. Macro performance – Even if the local economy is sound, areas and suburbs predominantly exposed to tourism markets are usually the first to be hit during economic downturns. The reason for this is twofold. Firstly, travel and tourism is a discretionary spend and when budgets get tighter, people tend to travel less. This can impact the vacancy and/or the amount you’re able to charge in rent.
Secondly, when things really get tough (such as during the GFC), property owners may have to liquidate assets. Guess which type of property or asset is usually the first to go? It won’t be their high yielding apartment in Sydney, it will be the holiday rental that they only use a couple of times per year. If this is done by a number of people at the same time, prices can drop considerably. This happened in Noosa Heads during the GFC where the median price of houses dropped from $785,000 in 2008 to $590,000 by 2011 and was still approximately $70,000 lower than its previous high in 2016. The median price of units in the same area had declined from $745,000 in 2007 to a paltry $492,500 in 2015 with no real signs of recovery – not spectacular numbers!
3. Rental demand – Holiday areas are subject to seasonal variation and therefore are traditionally transient with regard to the population itself. Workers come and go, holiday makers come and go and therefore demand for rental accommodation can vary from season to season. The single biggest supporter of your cash flow is the rental income that the property receives and depending on where and what you buy, this can drastically affect the return on your property. This risk is further exacerbated in holiday locations where longer vacancy periods are not uncommon.
4. Tax – With regard to the deductions available for the property, for you to leverage the maximum amount available to you, the property must be available for rent. This means that the more time you block off for personal use, the less you have available to you in the way of tax deductions over the year, further worsening your cash flow.
5. Cost – When you actually crunch the numbers, it rarely works out cheaper to hold a holiday home for an entire twelve month period just to use it a couple of times per year, versus simply renting out a property in the exact same location for the times you want to stay in the area. Of course, the emotional benefits to owning a home also apply in this case and although it’s a nice feeling, you will be far better off to pay a week or two’s rent in your favourite holiday destination than have the risk of vacancy, maintenance, management fees, mortgage and every other associated cost. The realities are that most people aren’t able to find the time to use their holiday home for more than a couple of weeks/weekends a year anyway.
6. Location – Do you really want to holiday in the exact same location for the next twenty years? It’s a big, wide world out there and whilst it’s nice to have a place for a second home if and when you need it, what happens if one year you want to experience something different? If you’ve bought a holiday home you’re now essentially locked into holidaying in the same location to ensure you’re actually making good on the reason you bought it in the first place.
Of course, there are many benefits to purchasing a holiday home but given the primary reason that people do it is to ‘straddle the fence’ by trying to mix emotional purchasing with their investment decisions, it is a much better idea to separate the two. Remember, your overall goals must be taken into account as well as all associated risks with the property. By purchasing a holiday home for part investment purposes you are exposing yourself to unnecessary risk and it is more than likely that your favourite holiday town is not the best place to be investing in for maximum capital growth anyway.
By making unemotional, well researched, well planned and well executed purchasing decisions with regard to your investment purchasing in fundamentally sound locations, you will have a much better chance of success overall. This will mean more money in your pocket in the long term thereby allowing you to go on bigger and better holidays, anywhere you want!
Contact PMC Property Consultants for all your investing and property management needs.