Are holiday homes a good investment?

Even though owning a holiday home may seem idyllic, it’s crucial to determine your primary reason for buying a holiday home. Are you looking to make a financial investment or do you want to buy a property as a personal retreat? It could even be a blend of both, but one aspect could be more important to you. 

Having clarity on why you want to purchase a holiday home could help you narrow down your budget and ideal location. For example, if your main purpose is personal use, selecting a location you frequently enjoy visiting makes sense. On the other hand, if you aim to generate some rental income when you’re not using the property, you may want to consider popular holiday spots for buying. Further, you might want to explore properties with features that typically attract holidaymakers, such as scenic views or proximity to popular tourist attractions. 

Your purpose for buying a property could also affect your borrowing capacity. If your primary aim is investment, getting a mortgage for a vacation home may prove challenging, as rental income during the off-season could be uncertain. Having a guarantor on your mortgage application or using equity from another property to secure the loan could make your loan application stronger. However, keep in mind that holiday homes often have high vacancy rates in the off season. You need to consider whether you can afford the mortgage repayments for periods when there’s no rental income from the property. Besides the mortgage, there are other ongoing costs associated with buying a property, such as insurance premiums and maintenance costs.

Remember, just because you’re a fan of the coast or desert, doesn’t mean every other family or couple under the sun will want to stay at your property. Preparing for uneven cash-flow is imperative, and you should also ensure you’ve got enough money set aside to cover mortgage repayments, in case demand for holiday rentals slump.

Purchasing a holiday home may seem tempting but it is crucial to weigh the pros and cons to make an informed decision.

Pros of investing in a holiday home

Here are some of the potential benefits of investing in a holiday home.

Personal getaway

Your holiday home can serve as your personal retreat, saving you the hassle of renting accommodation for your holidays. If you’re working from home, it could enable you to enjoy the “workation” experience, where you can work remotely while surrounded by the comfort of your holiday property. On the downside, your property won’t generate any income during the period when you use it.

Rental income

Holiday homes in popular tourist destinations could generate substantial rental income, especially during peak seasons. This income could help offset the property’s expenses, while providing an additional source of income. However, it’s crucial to remember that holiday homes often provide inconsistent income, as they are generally in demand only during the holiday season.

For example, if you were to aim to have one week of holiday rent cover one month’s mortgage, this could allow you to cover the full year’s mortgage repayments in only 12 weeks. This could let you enjoy upsides from further bookings, while leaving you time to enjoy the property yourself.

Potential for capital gains

Properties in popular holiday destinations may appreciate in value over time, leading to long term financial gains if you decide to sell. However, just like any other investment, the value of a property can fluctuate depending on the market conditions. 

Tax benefits

There could be potential tax benefits of owning a holiday home. As a property investor, you may be able to claim deductions for property related expenses, such as the interest on your mortgage, maintenance costs, and property management fees. However, the Australian Taxation Office (ATO) clearly states that these deductions are only applicable for periods when the property is either rented out or genuinely available for rent.

Cons of investing in a holiday home

Despite the potential benefits, it’s vital to understand the cons of investing in holiday homes to make a sound financial decision.

​​Upfront and ongoing expenses

Purchasing a holiday home is a substantial financial commitment. Besides the purchase price, a holiday home requires ongoing maintenance, cleaning, and management, which could be costly.

As demand for holiday rentals often depends on the amenities offered, you may also need to spend a substantial amount of money to include features that attract vacationers, such as a swimming pool, modern furnishings, and a well-equipped kitchen. Make sure to factor these expenses into your budget before purchasing a holiday home.

Further, you may also need to hire a property manager to handle the bookings and general maintenance, which could add to the overall cost of owning the property.

Inconsistent rental income

Vacation homes are generally in demand during the holiday season. At other times, you may experience high vacancy rates, unless your property is situated in a location frequented by tourists throughout the year. Moreover, if you plan to use the property for personal vacations during peak rental seasons, you could lose out on substantial rental income.

If you own a holiday home, it's vital to ensure that your property is adequately protected, whether you're staying there, renting it out, or leaving it unoccupied for some time. Purchasing home insurance could help protect your property, but insuring a holiday home is different from insuring your primary residence.

Most home insurance policies provide coverage against damage caused by unpredictable events, whether natural (like flooding and storm damage) or caused by humans (like vandalism or theft). However, the level of coverage offered by different policies may vary. Further, an insurer may void your coverage if the insured property remains unoccupied for extended periods, typically for 60 consecutive days or more. Even if the property is occupied by someone other than you or your family members who normally reside with you, an insurer may consider the house unoccupied and void your coverage. 

If you plan to rent out your property, you may want to consider landlord insurance, which is designed to provide coverage against damage caused by tenants on a property. However, landlord insurance may not be available for short-term rentals. If you rent out your property through a vacation rental site like Airbnb or Stayz, you could check with them for any insurance policies that cover damage caused by short-term guests.

Generally speaking, all insurance policies are different, and it could help to compare different products to find one that best fits your requirements. Speak to your insurer and read their Product Disclosure Statement (PDS) to understand the exact nature and level of the coverage offered before buying any insurance policy.