Holiday homes as investments?

I was recently on Sky News Real Estate chatting about holiday homes.  Are they ever a good investment? As most of you would guess, the answer is usually not.  They tend to be bought for lifestyle reasons with most holiday home buyers falling victim to holiday romance, instead of taking long term investment potential into account.  So why are they usually a poor investment choice?

The reality is that most of us prefer to take our holidays away from capital cities here in Australia with smaller seaside locations dominating. However, most of these smaller coastal and regional towns experience less demand than our major employment-centric cities and so don’t always achieve the same capital growth that investors rely on. For example if you take Bondi capital growth in houses vs a coastal town like Port Macquarie, Bondi houses have averaged 7.4% per annum in the last decade compared to Port Macquarie’s 2.75%. This is just one example but statistics provide us with information and historical data clearly shows us the differences in high demand and growth areas over others.

So what are the most common mistakes people make when buying a holiday home?

1. They buy with the heart not the head and only hear what they want to hear when making that decision to buy. Humans are justifying animals by default and can talk themselves into anything if they want something badly enough, holiday homes included.

2. They don’t seek a second opinion but rely on the selling agent (who’s best interests lie with the vendor and obtaining the highest price) only when purchasing. Many a stale listing has been sold to a “blow-in” or a tourist, if you ask selling agents in coastal towns, as non-locals aren’t as in tune with the market.  This can easily lead to over-paying or buying in a less desirable area/complex.

3. They don’t take into account ALL the costs if holiday letting: These can include higher cleaning, wear and tear, maintenance costs as well as management costs.  Many purchasers fail to take these into account and are surprised when a good property manager is charging them 16% rather than a standard 5-7% for longer term leases.  Rates are also often higher in regional and coastal areas and land tax costs can also add up quickly especially if you own a house, as the OSR (Office of State Revenue) collects on any property you own that has a land value content  higher than the current state threshold (NSW has a current threshold of $482K)
4. They assume lower vacancy rates. It’s wise, if you do intend to rent out the property whilst you’re not using it, to ask to see the rental ledger and speak to the PM about the reality of how many weeks vacancy per annum the property is likely to have or a similar property on their books. Most purchasers over-estimate the popularity of their holiday home, particularly when there’s competing properties in the same area.

If cashflow isn’t an issue, and you are still keen to splash out on a weekender or permanent holiday getaway then do look for properties that are also attractive to local home owners in any area.  Long term appeal to a range of buyers will always also stand you in better stead when it comes time to eventually sell.