Holiday house?

Hi all,

I get this question a lot so I thought I'd put some information out there to help people decide on whether it's a good idea to buy a holiday house.

Firstly, it really depends on your reason for the purchase - are you looking to invest or is it a lifestyle property? First rule, never mix both. If you want to invest there are many options out there where you can achieve investment goals without the added risk of buying a property in what would unlikely be the best area for growth at any given time.

Secondly, consider the cash flow and tax scenario. If you block out the property for person use, not only are you reducing your available income but you are also reducing your tax benefits...which brings us back to point one, why are you doing it in the first place?

It is far better to buy an IP to make money and only buy a holiday home if you are already financially secure and don't really plan on using it to make money. That way you can go to many different holiday destinations while you make money elsewhere!

I've written about this in a lot more detail at the link below, including further considerations, which I'd encourage you to read if you're in this boat and are currently deciding what to do. It's the time of year where people consider this type of thing so please educate yourself before you sign any contracts!

The Beach-side Blues - PMC Property Management - Experienced Property Managers

Cheers,

Andrew

 

Totally agree with you on this @PMC Property

A holiday house/unit will most likely set you back $250k+, how many holidays will it take to cost you $250k? Even if you blow $10k on each holiday, it is still going to take many visits to catch up to that accommodation cost.

 

Spot on. It's usually an emotional decision justified by the added belief that it's also a good investment. Some may be, but it's better to separate the two.

 

I moved into my holiday house and take a ‘holiday’in the city for work. Much better.

 

I think plenty of people like that idea!

 

I got the idea years ago from some the the older guys that spent most of their retirement/semi retirement out on the water, they had actually bought their holiday homes right down by the beach years previously and used negative gearing and short term renting to pay it off.
Because of the low cost they paid off in 10 years or so , in many cases the yields were greater than conventional rentals .
And as we found out the property still doubled in value in 10 years as it rode the wave that powered Sydney.
Its also probably a really good idea to have a good understanding of the rental/ holiday market in the area that you intend to buy in.
Its helpfull if you grew up or spent time living there in your younger days .

 

I wonder how competition and vacancies in the holiday rental market has been affected by AirBNB etc? It seems there are a lot more properties available for short term rent in coastal holiday towns these days thanks to how easy these websites make it for owners, I wonder if this has translated into higher vacancy rates or if more people are using the service to make up for it?

 

In areas with really high occupancy rates during the peak school holiday season it makes very little difference as no one needs to discount.
In areas with a large supply of properties and lower occupancy rates many start to under cut each other to the point that they make very little money.

 

Air BnB is really just another letting method - Stayz, Homeaway, Air BnB. Probably the primary difference is that Air BnB often have the owners still on site. Which yes, could possibly have increased the supply.

On the other hand, it has possibly simply opened up a different market i.e. young couple who can rent a granny flat on someone's property near a beach who wouldn't necessarily rent a whole property.

 

The answer here is pretty much "buy property anywhere nice in the 80s/90's/early 2000's & ride the boom"

As a younger guy, I can't help but feel an occasional stab of jealousy at baby boomer colleagues who bought holiday homes at the Gold Coast / Sunshine coast back in the days when you could get a 3 bedder for <$80k.

Decades of Australian wage suppression & a massive rise in the "real cost" of housing has made that sort of trick fairly well unrepeatable.

I'd love to be able to buy a nice holiday place even if it was going to long term under perform vs a comparable investment, but property is so damn expensive now I nor most people can casually tie up a few hundred thousand dollars on a mortgage on a property that isn't going to cover its expenses.

Also in true boomer form, the "negative gear my holiday home" strategy is rapidly being closed to the next generation (https://www.smh.com.au/money/tax/tax-warning-for-holiday-home-owners-20180522-p4zgpt.html), which is fairly typical of Australian macro policy.

 

yeah, just like the timeshare model,

when I was a kid, my parents went to a seminar and was disuccsuing it

I remember asking my parents, um, what happens if we want it during christmas as is everyone else,

 

The ones I am seeing win with the holiday home model at present are high net worth folk who want to own beachfront or significant ocean view properties... and have 1 of 2 goals.

Option 1: Drive it like a business and generate 5-7% net yeilds
Option 2: Don't need the money and basically keep it for family use. However will sometimes short term let when unused creates partial tax advantage.

Their long term plan (10+ yrs) is to pay it off and have for personal use or move into it as retirement home mostly. They are very patient though.

The properties need to be premium for their respective locations, ocean views, walk to beach, lakefront or beachfront etc. So many are in the $1-3m price point.

If doing short term letting for income you need to drive it like a business, pick a cracking specialist manager, pay their hideous fees, advertise in multiple locations to get occupancy up and wait 2-3 yrs for repeat business PLUS new business to make it truly profitable. In those cases I am seeing people end up with net cash flows that properly outperform long term rental. You can't just take all the peak times yourself, advertise it with a local sales agency that does some holiday homes on the side when you aren't using it, and expect to achieve decent returns.

I have seen individual beach homes with $100k+ gross incomes still netting down to over 5%.

For average earners with limited incomes, it's probably not ideal 9 times out of 10.

 

Doesn't everyone do this? I must be mixing with the wrong crowd.

 

I know right?

One guy bought 2 houses, bulldozed them, built a $7m home, then bought the neighbour out, bulldozed that house and built a tennis court. All oceanfront. I believe its just him/family/friends who use it.

 

My family owns a holiday house on the beach in WA.
It’s been in the family since before I was born (I’m 36).
It’s an old beach shack about 1.5hrs from Perth.

Some facts, despite it being used by 4 families (parents and 3 adult ‘kids’) it is vacant about 75% of the time. And when it’s used it’s used by 2or 3 families (peace and quiet - it is not).
Though in saying this the usage has increased significantly in the last 18months since my parents retired. They are probably up there 1week in 4 now.

We have tried short term letting it, however that requires someone to be available, and then clean it afterwards.
To have a manager do it for you, you net about 50% of the gross rent (I think this is pretty universal - a friend of mine has a ski chalet in NZ, and short term letts it, with over 5years data he has an average occupancy of 80+% year round, and nets 45-50%. By his maths he can put it on long term lease, and net more (it just wouldn’t be available for the 2weeks/year he wants to use it).

The capital growth has been average at best. My parents paid $18,000 for it when they bought it. Today we would probably get about $350,000 (36+years later).
However, the house is falling down and needs to be replaced. For something suitable we need probably about $200-300k. Doing this will probably take the value to about $600k.

Proir to the GFC it was bank valued at about $650k, however, holiday homes got smashed since then.

So, long and short of it is
A) unless you buy in a very popular tourist area, a holiday house is unlikely to be a great investment. Or at least, there are probably better places to invest. And holidaying with a lot of tourists isn’t my idea of a holiday.
B) consider how much you will really use it. Anything more than about 2hours from your home makes it a pretty decent journey to-do for a weekend. How many weekend will you actually do it? Try before you buy. Spend a whole year trying to get to your favorite place every weekend, and see how many times you do. From experience it’s far less than you would like.
C) given capital cost, low income and opportunity cost, it is far cheaper to pay for someone else’s air bnb.
D) if you short term let it, most likely you’ll want it the same weekends which are your peak demand! So you then have another decision to make. Do we use the house (for free) but lose $x,000 income. Or de we generate the income, and rent a house close to our house (for less), or do we just skip this long weekend of perfect weather and go ‘another time’.

If you have some cash to splash on a holiday home, my reccomendation would be to drop that into a market based ETF, use the divs to pay for your annual holidays (where ever you want to go).
Unless you are near retirement and want a ‘second home’

Blacky

 

Rather pay the $1,000 or whatever a week, hand it back to the owner at the end and let them deal with problems or rates, taxes and maintenance.

 

I have clients who have holiday homes. Most would never rent them and see it as a lifestyle choice. They wont rent them out as they love the personal sense of enjoyment and privacy it brings. They just drive up and its like coming home.

Like some people buy a boat, others a small plane etc. Its as personal as the choice to buy a huge home when its just two of you. Or buying close to a beach and spending millions. Some eventually tire of them and when that happens they sell. Its like buying a Ferrari. If you can afford to, its a great thing. But it may make a lousy investment. Not all spending needs to be an investment with a financial return.

My in laws bought several timeshares and if you didnt know more you would think they were nuts. But they bought them in the days of the trading post and paid very little on the secondary market for a lifetime of rights. That was approx 20 years ago. I think they have three. They looked at is as a prepayment of holidays and it gave them rights to exchange across the globe. They have used that feature a lot. They wouldnt sell them as they provide a nice return in free holidays when they want one. If they look like losing a week or two and they cant bank them they offer it to family at cost for the minor charges for linen etc. They reckon for the $6K they spent they have got back $30K or more in savings and they could easily sell the rights but wont.

 

Yes, that’s the problem with renting short term.
You lose a lot of the ‘ownership’ feeling. It’s not just yours.

Like a boat the cost is directly inversly proportional to the usage. If used regularly they are a cheap form of entertainment.
If used rarely they are hugely expensive.

In saying all the above. We have discussed several times liquidating the house. But have all agreed to never do so. It’s a priceless experience, and doesn’t cost us anything to own.


Blacky

 

Boats ? They are always expensive. And exponentially expensive with each metre of length or metre of mast.

The rule of the three Fs.
Never buy but rent anything that floats, flys or f*%ks.

 

BOAT stands for : Bring on another thousand!
I have one over 6m so know all about this, however it was a lifestyle choice and I don't care what it costs me as the enjoyment when on the briny is priceless.