Earlier this year I had the good fortune of spending a lazy long weekend on the Sunshine Coast. Warm, sunny, relaxing, low stress – it was all of this and more. We had a wonderful, luxurious time, doing not much more than swimming with the kids in the resort pool, reading books on the lounge chairs, and refueling on takeaways for dinner. (After all, we were too relaxed to cook!)
It was blissful. Before long we were making plans to return for another vacation later in the year. So it didn’t surprise me when, less than 24 hours into our stay, my husband casually commented, “I wonder how much it costs to buy one of these places? Wouldn’t it be great to buy a holiday home here so we can come and go as we please?”
And that’s how it starts, doesn’t it? The old ‘fall in love with a location on holiday and consider buying into the market’ cliché. It happens to the best of us because we’re emotional creatures. How we feel about something can dictate how we act on it.
This emotional factor is what drives most holiday destination property markets across Australia – and it’s what can make them so volatile.
RESEARCH TIP: CALL THE COPS
You might not think about calling the local police station, but it’s a great strategy for getting the real story on a particular suburb or town, says Paul Bieg, director of BIG Property Investments. “We’ve done this in the past to get a better understanding of an area we were looking at investing in. Once there was a suburb about five to 10 minutes’ drive from South Headland. We called the police and asked about crime and the local population, and they were super helpful! They shared with us the areas that were riskiest, and those that were safer. Especially in a regional location, this can be a really useful tool because they’ve got their finger on the pulse of what the local area is like.”
The risks of holiday home investing
The benefits of investing in a holiday home are clear from the outset: when you own your own vacation home, with your own furniture and decorated to your own tastes, you have a ready-made holiday destination available for you to relax in whenever you like.
As an added bonus, you can make an income off the property for the 11 months or so of the year that you’re not making use of it.
But what are the risks of investing in a holiday home?
It’s important to understand that when you invest in a property market that is driven by a volatile industry such as tourism, there are additional risks to be aware of. As well as all of the usual property investing risks to do with unemployment, infrastructure and the economy, you need to factor in other potential drawbacks, such as:
• Cash flow risks
When you own a holiday home as an investment your income can be inconsistent. During peak periods you’ll be in the money, but during the low season you might find your property only rents out for a few nights a month (if that). As a result, you may need access to some extra funds to help you cover the low-vacancy periods.
• Wear and tear risks
With a greater number of people living in your holiday home, there may be more wear and tear on the property overall. Think about it: over the course of 12 months you could have dozens (or more) people dragging their suitcases in the front door, moving furniture around to suit their needs, and pottering around in the kitchen. This could increase your maintenance costs.
• Body corporate risks
Often when you’re looking at investing in a holiday home, you’re considering an apartment. This means you’ll need to pay body corporate levies on your fully featured vacation investment – and with pools, spas, saunas and tennis courts to consider, these can be hefty. For instance, one townhouse that we investigated on the Sunshine Coast came with a body corporate contribution of $7,000 per year, or $135 per week!
• Insurance risks
Insurance costs can be higher on a holiday home investment than on a regular residential lease. This is because insurers deem these types of short-term letting arrangements to be riskier than standard leases so they charge a higher premium accordingly.
All of these risks can add up to a significantly higher cost of investing.
This doesn’t necessarily mean you must discount holiday investments altogether. What it does mean is that you need to be aware of the additional costs involved and factor them into your assessment of a potential investment.
This will help you make your ultimate decision as you will need to weigh up the most important question of all:
Are all of the extra costs involved in owning a holiday home worthwhile, or am I so emotionally attached to the idea of owning a holiday home in this market that my emotions are clouding my better judgment?
For many investors, the answer to this question is a definitive no.
For others, the advantages of owning a holiday home may still outweigh the potential downsides. If this is the case for you, then it’s essential that you qualify the market when researching your investment before you commit to a property that could drag your finances down.
How to qualify your investment
When purchasing a rental property, whether as a standard residential investment or a holiday home, it’s crucial that you do your due diligence to ensure the property has the best possible chance of growing your wealth long term.
This will help you move past making a purely emotional decision and ensure that you sink your funds into an asset that will ultimately move you closer towards financial freedom.
Paul Bieg, director of BIG Property Investments and DUPLEX INVEST, says there are a number of steps you can take to qualify your potential investment property. He boils it down to three key factors:
“More and more companies are giving information away for free,” Bieg says. “You can google the suburb you want to invest in with the words ‘property report’, and you’ll get relatively current statistics – about six months behind – on any location. You can get access to information such as recent sales, percentage of units to houses in the suburb, demographics and age groups, vacancy rates and more.”
2. Estimated value
Once you’ve done your initial research, try to build a picture of the property’s estimated value. Use data such as previous sales history and comparable sales to help you get an idea of property values in the area. “Just understand that the information is based on numbers; no one from Google or OnTheHouse has actually gone out to view that property, so they don’t know if it’s the best house on the street, or it has a great view, or has had $100,000 spent on renovations,” Bieg says.
“These things are not going to be apparent in the valuation, so use the value estimate as an average or a guide, but don’t rely on it.”
3. The people factor
After getting your head around the facts and figures, you need to “actually speak to real people”, Bieg advises. This could be real estate agents, town planners from the local council, or representatives from community groups. “I always like to speak to property managers, as they’re concerned about getting your business on an ongoing basis. They can be more honest about the local market because once they get your business they actually have to rent out your property!” he says. “They might give you insights such as ‘Well, you’re not going to get much for that property because it doesn’t have a car park and everyone here owns a car’, or ‘It only has one bedroom and you’ll need more bedrooms in this suburb’.”
The ATO and holiday homes
One final and important consideration when purchasing a holiday home is the tax implications of your investment.
When you choose to stay in your holiday investment, whether for one night or one month, the expenses involved in owning the home are not tax deductible during that period.
“You can get access to information such as recent sales, percentage of units to houses in the suburb, demographics and age groups, vacancy rates and more”
The same rule may apply when you invite a friend or family member to stay in the property for free. During these periods, because the property is not genuinely available to the general public to rent, the expenses you incur are not tax deductible. This is because technically your asset isn’t income-producing, or available to produce an income, so relevant tax deductions are not permitted.
“I always like to speak to property managers, as they’re concerned about getting your business on an ongoing basis”
For instance, let’s say you choose to stay in your holiday home for three weeks of the year. In this case, you would need to deduct three weeks’ worth of ownership expenses – including mortgage interest, body corporate fees, insurance and council rates – from your overall deductions for the year. This will reduce the profitability of your investment, though the degree to which you will be financially impacted will depend on your individual circumstances.
Furthermore, it’s important to note that expenses are only deductible throughout the year if your holiday home is genuinely available for rent.
According to the ATO, factors that may indicate a property is not genuinely available for rent include:
• The property being advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised:
» at your workplace
» by word of mouth
» outside annual holiday periods, when the likelihood of it being rented out is very low.
• The location, condition, or accessibility of the property mean it is unlikely that tenants will seek to rent it.
• As the owner, you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out. These could include setting the rent above the rate of comparable properties in the area, requesting references from your prospective tenants, or enforcing unreasonable restrictions such as ‘no children’ or ‘no pets’.
• Or you simply refuse to rent out the property to interested people without having adequate reasons. If any of the above apply, you may find yourself running afoul of Australian tax laws. If you decide to proceed with a holiday home investment, be sure to check with your accountant regarding your eligible deductions to ensure you don’t end up on the wrong side of the ATO.
This article is an extract from Your Investment Property written by Sarah Megginson
Property Friends is a specialist Property Investment Advocacy that has been operating for the last 13 years on the basis of 3 principles: Trust, Community & Progress. www.propertyfriends.com.au (03) 9758 5331