Holiday home ownership: Is it a smart investment?

    Spending holidays at the beach is an important part of life for many Australians, with approximately 3% owning their own holiday homes1. The promise of escaping the stresses of everyday life through holiday home ownership can be an enticing proposition, but do holiday homes make a good investment?

    When it comes to investing in property, it is easy to let your emotions rule. Many property sales in popular holiday destinations occur during, or immediately after, the peak holiday period. This suggests that most holiday home purchases are emotionally motivated. Mixing the property’s use as a holiday home with the requirements of an investment property can be a difficult balancing act. Before you make any decisions you should consider the benefits and risks associated with this type of purchase.

    Benefits Risks
    The possibility of free accommodation with unrestricted access. Occupancy rates can fluctuate unpredictably. The demand for holiday home rentals generally lasts for approximately 8 to 10 weeks of the year depending on location.

     

    You will have the option to rent your property out for the periods of the year that you do not intend staying there to mitigate some of the holding costs and potentially produce income. This can be particularly beneficial during peak seasons.

     

    If you rely on the income generated during peak holiday season, you will not be able to use your holiday home during these periods.
    The value of your holiday home may increase over time. The potential for capital growth on property investments is generally higher than that of cash and fixed interest investments. The costs associated with the property may be prohibitive. Holding, marketing, management and maintenance costs have the potential to absorb a significant proportion of any rental income generated.

     

    You are able to claim a tax deduction for expenses incurred in maintaining your holiday home for the period of time it is rented out. Any rental income or capital gain that you realise upon sale of your holiday home will be added to your assessable income and taxed at your marginal rate in that financial year.

     

    You may choose to make your holiday home your principal place of residence once you retire. The majority of holiday homes are located in regional areas, and have a much slower capital appreciation rate than properties in metropolitan areas.

     

    Property prices in holiday destinations can be quite volatile. If there is a property market downturn, holiday areas are often the first to suffer and the last to recover.

     

    Investing in any property is an important decision. Rational thinking is required, and the objectives of the property should be clearly defined. It is worthwhile consulting a professional adviser before making any property investment decisions.

     

    1. http://www.roymorgan.com/findings/5847-holiday-home-ownership-highest-in-melbourne-june-2014-201410012331

    Disclaimer: While every effort is made to provide accurate and complete information, Trilogy Funds does not warrant or represent that the information in this article is free from errors or omissions or is suitable for your intended use. Subject to any terms implied by law and which cannot be excluded, Trilogy Funds accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omissions or misrepresentation in information. Note: All figures are in Australian dollars unless otherwise indicated. This information is issued by Trilogy Funds Management Limited (AFSL 261425) and provides general information only. It does not provide financial product advice nor is it an offer of securities. Applications may only be accepted by completing the applicable application accompanying the relevant PDS. If you require personal advice on the suitability or other aspect of this investment, consult a licensed adviser, who will conduct an analysis based on your circumstances. Past performance is not a reliable indicator of future performance. Mortgage trusts are not bank deposits and are not government guarantees.

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