Property investment in itself is a road with many ups and downs. Mix holiday homes in the matter and then it becomes a risky business. The problem with holiday is the fact that most of the time they are located in places which are seasonal in nature. Sometimes there are a large number of people wanting to rent out your holiday home and other times you will struggle to get a tenant. It is perhaps because of this reason alone that many experts continue to believe it to be the worst property investment. Properties can be vacant for six months a year. Worse, people often have to sell the property for less than they bought it for, due to the poor cash flow.
If somehow you are still considering holiday homes as a viable option to sink your money in then glance upon these 6 reasons on why you shouldn’t.
TOO MUCH MARKETING
Holiday homes in most cases are not long term rental property as the tenant market is seasonal at best and thus entirely different. So to make the most of your investment you might just have to hire property managers who are experienced in short-term accommodation letting. These services are not cheap as in some instances you might have to pay as much as 20% of the rental. Then there’s the consistent marketing of your holiday-let investment, which essentially has to happen all year round to be effective as people book their vacations months in advance. These expenses need to be accounted for in your cash flow calculations.
HIGH COSTS OF MAINTENANCE
When you are in the business of renting holiday homes you will be required to have all amenities present from day one. The accommodation should be equipped with necessities, such as cutlery, glassware and crockery to provide for the various needs your guests might have. With this comes the risk of greater wear and tear than usual to your investment since the nature of stay will always be short term.It’s more likely you’ll be footing regular bills for repair works due to a greater risk of accidental damage, and will need to replace furnishings and appliances frequently.
THE USUAL TAX BENEFITS FROM PROPERTY INVESTMENT MAY BE DIFFICULT TO ACHIEVE HERE
Negative gearing is a very important tax benefit that property investors usually aim for in Australia. However in the case of holiday homes sometimes, the ATO will only allow you to claim any legitimate deductions associated with your lifestyle investment during periods where it’s tenanted or available for lease. This means if you use the property for your pleasure, you might only be able to claim a portion of what would usually be fully deductible costs of ownership.
THE OPPURTUNITY TO GAIN LONG TERM CAPITAL GAINS WILL BE LOST
It takes a lot of research and money to find a holiday home to invest in at a sought after location like coastal hotspots. Usually, that is not the case for most property investors. Many holiday locations rely on one or two seasonal industries to sustain their local economy. Demand for accommodation is erratic, and while it might be in short supply during peak periods, that consistent interest from owner-occupiers is just not there. Additionally, spending on holiday home investments tends to be discretionary, meaning they’re more susceptible to the negative effects of any economic downturns. This makes them less reliable in terms of capital gains and more difficult to offload if you really need to rid yourself of the debt burden.
RENTAL VACANCY PERIODS
Perhaps one of the most overlooked factors when it comes to purchasing a holiday house, is the seasonal nature of tenancy in many popular holiday spots. The period of high demand for holiday hot spots is approximately eight to ten weeks a year – those same eight to ten weeks a year you’re most likely wanting to utilize the house. As such, if you wish to use the property to generate income, you will need to find the balance between renting it out and enjoying it for yourself. Before you buy, do your research and find out vacancy rates in peak and off-peak seasons so you can understand how this might affect both your holiday plans and your cash flow.
NOT ESTIMATING YOUR INVESTMENT COSTS
Although this could be said for all forms of property investments it is especially true for holiday homes. One of the rookie mistakes for first-time holiday homeowners is not having a good grip on what their financial situation will really look like with an investment property to manage. For some, the financial fallout comes from underestimating the ongoing costs of running and maintaining the property. With council rates, utilities, cleaners, gardeners and insurance to manage, it can quickly feel like more bills are rolling in than rental cash. The second most common shortfall is overestimating demand for your property. Most holiday hotspots will experience seasonal fluctuations, and the low season can leave a yawning gap in income that can soon put you in the red.
At the end of the day, building a property portfolio is a business proposition, whereas family holidays represent a more emotional investment. If your aim is to create a viable retirement fund through real estate which it really should be if you decide to invest in this asset class then vacation in someone else’s holiday let while you relax, safe in the knowledge that your high-growth property investments are working hard for you.
