Holiday houses – delirium or dream? (Ep.81)

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In this week’s episode, Dave, Cate and Pete take you through:

  1. Lifestyle, investment or hybrid – what is a holiday house? The trio share whether you should be looking at your holiday home as a lifestyle property, a money-maker or a mix between the two. They shed light on the compromises involved when opting for the hybrid scenario, and the black and white facts that investors need to acknowledge.
  2. The opportunity cost of owning a holiday home. Holiday homes are typically in locations that do not exhibit long-term, outperformance capital growth, and your own use of the home will limit the rent you could receive and the tax advantages you could have gleaned if the property was intended to serve as an investment. To compound the financial impact, if you’re borrowing to make this purchase, your borrowing capacity will be significantly reduced for your next investment. Consider how your retirement goals will be impacted if you purchase a holiday home instead of a pure investment.
  3. Tax deductions. The trio explain the tax implications of leasing out your holiday home, whether it be a long-term, traditional residential lease, a short stay arrangement or an ad hoc approach.
  4. The perils of purchasing with friends or family. Be careful before you dive right in! Purchasing a holiday house with your mates or siblings may seem like a great idea at the time, but the reality of managing the property jointly can be the cause of many strains on the relationship. In addition to a usage roster and the clean-up and provisions protocols, co-owners also need to consider how joint ownership arrangements can change and evolve. The trio talk about the importance of an out-clause and rules around equity access before signing on the dotted line.
  5. Managing a holiday home. If you plan to lease out your holiday home for part of the year, there are differing management fees and service costs that must be factored in, depending on whether your property will be leased ‘hotel style’ like an Airbnb or for longer-term stays. From appointing cleaners to sourcing breakfast provisions, to linen changing and beyond, the trio discuss the various ways that holiday house investors can maximise their profits over a holiday period.
  6. When should you buy a holiday home. Although cash flow, long-term investment and ongoing maintenance are critical factors to consider, the memories and traditions that you’ll create with your family in a holiday home are priceless. The trio share when is a good time to consider purchasing a holiday home, and when running a cost-benefit analysis between renting vs buying is a more sensible approach.
  7. What’s in store for 2021? 2020 has seen some holiday locations take capital growth by storm. But will the tree and sea change trend continue or has the capital growth boat for holiday locations already sailed? The trio reveal their predictions for 2021.
  8. And of course, our ‘gold nuggets’!


Show notes 

  • What is a holiday house? 
  • The true definition is that it’s an extension of your PPR. 
  • You may have some short-term leasing arrangements or give the keys to your mates. 
  • If you’re using it, you can’t call it an investment strategy. 
  • Some people may think it’s a hybrid, but if it’s something you’re going to spend time in, first and foremost, you need to be happy spending time in it as a holiday house. Rental income should be a secondary consideration. 
  • Very hard to balance the two, you’ll have a compromised hybrid. 
  • Why do Australian’s have such a love for holiday homes? 
  • We have a love affair with property as a concept, the idea of driving a couple of hours to your holiday house is not an unusual one. If you were in Europe and driving a few hours, you may cross the boarder into another country. 
  • Historically, it’s been quite cheap. 
  • We love the ocean and it’s an aspirational idea, get some release from your day-to-day existence. 
  • However, they do tend to be cash guzzlers.  
  • How does it affect your finances? 
  • Extra debt 
  • Costs for a personalised fit-out and furnishings 
  • Money spent on improvements and a reduction in your cash-saving buffer,  
  • Minimal or no income. 
  • Reduction in your borrowing capacity, equity and savings, which may restrict your ability to invest in the future or upgrade your family home. 
  • Discuss with your partner or family what you are giving up by purchasing a holiday property. You may find this means fewer holidays to exotic locations around Australia or overseas, less time visiting family and friends and reduced cash flow. It may be better to budget a generous amount every year for holidays, than to purchase a holiday house. 
  • Missed opportunities 
  • The opportune time to get down there is when it’s hot. If you’re inhabiting the property at a time when you’ve got the maximum opportunity to make rent. 
  • Capital growth – Limited capital growth is more common in locations that are less attractive to owner-occupiers who make up 70 per cent of all property ownership. This can be debilitating to wealth creation and a silent killer that only becomes apparent after 10, 15 or 20 years. 
  • To put this in perspective, the difference between 4 and 6 per cent annual growth on a $600,000 property results in 33 per cent less wealth over a 20-year period, meaning $609,808 less in the kitty. 
  • Yield – There is also a risk that the property could be untenanted for most of the year due to:  
  • a lack of interest 
  • your requirement for short-term tenants only, or  
  • your desire to make use of the property during peak seasons. 
  • Better for 52 weeks than 8-12 weeks, but if you did this, it wouldn’t be a holiday home anymore 
  • Best return will be likely at the time of year that you want to use it. 
  • Borrowing for a holiday house 
  • Either it’s an investment or it’s a holiday house, you need to tell the lender. If it’s a holiday house, you shouldn’t be including proposed rental income on the property.  
  • It impacts your borrowing capacity – $500,000 or $1M to a holiday house. That limits you for your next purchase to go towards investing.  
  • Then when you borrow again, the lender will use the actual rent you’ve been receiving, which could be a lot less than you initially envisaged. 
  • Tax deductions 
  • Missed tax deductions – you can only claim the proportion that it was an investment. You can’t claim full deductions. 
  • Purchasing with friends or siblings – what can go wrong? 
  • The injustice of who stays there and how often is one tiny agitating point. Who doesn’t clean up enough, who doesn’t replenish the food in the fridge? 
  • Then you have extended family wanting to use it – teenage kids or children. 
  • Maintenances – mowing the yards, cleaning the gutters. It’s very hard to balance it out. Unless you’re very forgiving, you’ll see people start to get annoyed at each other.  
  • You basically want to have a signed agreement with each other.  
  • Selling out, accessing equity, getting more people involved.  
  • What if two people need the equity in the house – how does that person feel about being a guarantor on someone else’s loan? 
  • How does the management differ to a typical investment property? 
  • Airbnb – how do you facilitate this when you don’t want to be doing it yourself? 
  • Key access, bins, security, provisions, cleaning. 
  • When it comes to servicing a short-term stay, it’s more like a hotel and you need to pay for that. It is much more expensive 
  • A lot of people are turning their holiday homes into long-term rentals due to covid 19 
  • When should you buy a holiday home? 
  • If you’re on track for your retirement financial goals and you can purchase a holiday house and it won’t have an impact on your retirement, then go for it! There’s no price you can put on the memories and traditions you will make. But if you’re not going to reach your financial goals, then you need to sit down and work out the impact before you take the plunge. 
  • Boom and bust 
  • Byron Bay and Noosa, are the most renowned holiday locations and they’ve had strong capital growth. But they can be more impacted by economic fluctuations. And quite possibly a lot of these holiday locations are going to be stagnant because they’ve had 5 years of growth in 1 year. 
  • There is a real risk that you may have already missed the capital growth boat. A lot of these holiday hotspots that have broken records, could be artificially inflated because of the year that we’ve had.  
  • Is the growth driver a sustainable long-term driver? 
  • The work from home phenomena will not stay as flexible as it is right now. 
  • Mobile holiday homes 
  • Campervans and caravan sales are going through the roof. 
  • Money is burning a hole in our pocket because we can’t go overseas, so people are finding other ways to go on holiday. 
  • What’s in store for 2021? 
  • There could be a potential for a bit more of a run, but I don’t think it’s going to outperform what’s about to happen in most capital cities. 
  • It’s about the right holiday locations that have the wow factor and economic drivers.  
  • If there’s a bit more movement, fingers crossed, we’ll get back to some normality towards the end of 2021. And then you’ll probably see some flat or stagnant growth in these locations. 
  • Tree change and sea change phenomena will continue – we can be portable and take the train to the city when we need it. There will be some cities and regions which do well, but which maintain a connection to the capital city.  
  • People are still going to be looking for good primary and secondary schools, you’ll need to have regional centre with a good size population.  
  • You also want to stay close to your family and friends, so you can see them often – this won’t change. 
  • For the older population, they want to be close to hospital and health services.  
  • There will be continued adoption of tree change and sea change, but they’ll be close to major employers. 

David Johnston- The Property Planner’s Golden nugget: if you’re looking at buying a holiday house, work out the annual cost. Consider will it impact your retirement goals and whether you could allocate those funds to go to a great holiday every year or an investment property that will have more of a positive impact towards your retirement goals. 

Cate Bakos – The Property Buyer’s Golden nugget: If you can weigh up the scenarios – buy your holiday house and enjoy it, factor in the running costs. The second scenario is to think about it like a rent-vester, rent where you want to stay for your holiday and purchase an investment somewhere else. Get clear on the numbers.  

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