Eight reasons holiday homes don’t make profitable property investments

When the weather gets warmer and you enjoy those long, lazy summer days languishing on your favourite beach with the family, it’s easy to get caught up in the romance of acquiring a holiday home.

While there’s not necessarily anything wrong with owning a property intended more for vacation fun than financial gain, purchasing a holiday property is usually not a smart property investment.

We love a good holiday home

Aussies adore bricks-and-mortar and so-called ‘lifestyle’ accommodation is no exception, with around 700,000 holiday rentals owned by one in every 12 households.

Typically located in coastal locations or near inland waterways, it’s not surprising that many of us aspire to own our own little piece of paradise in areas where the watery recreation pursuits we crave as a culture are so prevalent.

Often holiday lets are purchased in areas that hold some personal significance – places where cherished memories have been created and where we already have a strong emotional investment.

But those warm fuzzy feelings elicited by the idea of a holiday home should never be the basis of a real estate investment decision, because it’s too tempting to “make” the numbers work in order to satisfy your own emotional needs.

Some people rationalize the financial outlay of a lifestyle investment by convincing themselves that if they had so much ‘fun in the sun’ at their beloved holiday spot, others will naturally want to do the same.

Their investment will be in high demand, so buying a property in a popular tourist destination makes perfect sense, right?

Wrong!

Fact is there are so many extenuating circumstances surrounding the viability of a holiday let that the likelihood of this representing a thorn in the side of your portfolio, and dragging down its profitability, is very real. 

So let’s explore eight important considerations you need to carefully weigh up when working out if you should buy a holiday home…

1. Letting and marketing costs can be high

Remember, this is not a long-term rental property, so your tenant market is entirely different.

Hence, you need to use property managers experienced in short-term accommodation letting who will charge more for their services; in some instances, you’ll 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 cashflow calculations.

2. Rental yields are not always reliable

Given that holidaymakers seek accommodation seasonally, particularly in traditional summer ‘hotspots’, you can never bank on consistent yields when it comes to a lifestyle investment.

This means you need to be financially capable of sustaining the mortgage repayments and associated costs of holding such an asset, independent of the sporadic income it generates.

3. Maintenance bills can be excessive

Renting out holiday accommodation requires your property to be fully furnished and equipped with the necessities, such as cutlery, glassware and crockery.

The nature of this short-term rental market means greater wear and tear will be inflicted on your investment than would normally be the case.

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. 

4. It may create issues with the taxman

One of the many perks property investors enjoy for providing private rental accommodation in this country is negative gearing.

But in some cases, 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. 

5. You will most likely want use of the property during peak rental periods

This decreases its income earning potential and in turn, augments holding costs, which in effect cancels out any savings you think you are making on your holidays.

Owning a holiday home doesn’t mean a lifetime of free sabbaticals, because in one way or another you are paying for it.

In fact, it would probably be cheaper to vacation overseas once a year than own a lifestyle investment!

6. Do you really want to visit the same place year after year?

This is something you need to really think about. While it can be nice to have traditionally favoured family vacation spots, the novelty could soon get old.

Consider all the missed opportunities if you feel obligated to return to your holiday let in order to justify ownership, foregoing other new adventures to exotic locations. 

7. It might not live up to expectations

You buy a holiday home with the idea that you’ll enjoy long, lazy summers there with the family.

But if you need it to generate an income in order to continue sustaining all those holding costs, there’s less chance it will be your family enjoying your investment and more likelihood it will be the short term tenants you rely on to generate an income.

8. You will sacrifice long-term capital gains

Unless you happen to be one of the lucky millionaires who owns a holiday shack in sought after coastal hotspots like Victoria’s Portsea or Sorrento, the chances you’ll buy a lifestyle property in a location boasting investment-grade assets is slim.

I’ve found that most 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 (who determine long-term growth patterns in property markets) 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.

The bottom line

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.

Want to know what I’ve been up to and what I’m buying? I’ll be explaining what I’m doing and just as importantly what I’m not doing at our upcoming Property & Economic Market Update one-day trainings I will be holding around Australia in March and April. You can find out all about this only round of national seminars I’ll be conducting by clicking here. Reserve your place now.