The holiday season is nearly here. Perhaps, if you’re lucky, you’ve got a stay booked at some idyllic resort town. And perhaps like so many before you, you’ll find yourself in love with the area and making enquiries with the local real estate agent about buying a piece of it.
According to a 2005 survey run by BIS Shrapnel, 7.8% of Australian households own a holiday house. But it’s important to think with your head, not your heart, when buying an investment.
“A holiday home’s greatest incomes are achieved during the holiday periods when there’s greatest demand,” says Angie Zigomanis, Senior Project Manager at BIS Shrapnel. “But obviously they’re the times that you’d like to be using it as well.” Some areas become more ghost town than resort town in the off-season, which is problematic if you’re an investor that’s sensitive to cashflow.
In Port Stephens, two hours drive north of Sydney, the ‘on-season’ – the average holiday rental period, is around 18 weeks of the year, according to Bruce Gair, Principal at Port Stephens PRD Nationwide Real Estate. Gair says holiday homes can be good investments, citing rental yields of “around four and a half, sometimes five per cent,” as long as the investor has carefully considered the location.
“We suggest to [investors] that they really take note of where they’re buying – near restaurants, cafes, near the beach or marina, good views – we take all those things into consideration,” says Gair. He will sometimes recommend against using certain properties as holiday homes if they lack these features, suggesting permanent rental instead.
But if you think a holiday home in a good spot is a ‘set and forget’ investment, think again. “When people come away for holiday, they actually want to go somewhere that’s better than their own home,” says Gair. “So [the owner has] got to really present it well and reinvest in it – so every five years make sure it does have a fresh coat of paint, make sure it’s re-carpeted, make sure the electricals are up to speed… you’re getting more and more new resorts with those sorts of things in it and you’ve got to compete with them.”
You’re also competing with other holiday homes, so to get the bookings you’ll need to advertise. Then there are insurances to consider, like landlord’s insurance, building and contents cover, and public liability insurances. There’s also the cost of council rates and land tax (calculated and charged differently in each State). Managing agent’s fees are at a premium, due to administration, bookings, cleaning and maintenance. “Up here they range between 13.5 to around about 16.75 per cent [of the rental income],” says Gair.
Sounding a little less appealing? There are other options available, like combining with friends or family and working out a share arrangement. You could also look into potential savings by advertising the property online. And then there’s the benefit of tax breaks.
But read the fine print when it comes to tax advantages on your holiday home. If it’s only available for rent for part of the year, only partial deductions could apply. And while sneaking in a holiday while on a tax-deductible inspection visit sounds inviting, only the portion of travel that is directly related to the inspection could be deductible. It’s always best to get proper taxation advice before you buy.
As for capital growth potential, once again, it’s all about location. “I think that the holiday areas within a reasonable distance of the major population centres will do the best over the medium to long term,” says Matthew Bell, economist at Australian Property Monitors.
But the recent economic downturn hasn’t helped prices. “People are in situations where income’s dropped, they’ve had to sell down assets and the holiday home is often the first one to go,” says Zigomanis.
Bell explains that weak tourism fuelled by a strong Australian dollar will further limit the potential. “While we’ve seen strong recoveries in the capital cities over the last six months, this hasn’t been repeated in coastal centres in the eastern states,” says Bell. “Indeed, for coastal centres in both QLD and NSW, the current median prices are still well under the levels of late 2007 for both houses and units.”
Ultimately, whether a holiday home is a good idea depends on your goals for it as an investment. If it’s all in the name of long-term love, it might just be worth the effort.