Owning a holiday home provides multiple economic benefits, whether it’s used for personal holidays, a retirement home or an investment home.
Choose the right location
Don’t neglect the future and consider whether the home is in a location that works for children or your future family dynamic. Are there enough services and necessities around including supermarkets and hospitals if you plan on retiring to the home? Consider the price of rent in the surrounding suburbs if you’re planning on purchasing the house as an investment property. Research whether the destination is a tourist hot spot and popular with other holiday goers.
Seasonality and use
Consider how often the holiday house will be used and when. Is the house located by a beach? The majority of holiday renters will be visiting in summer. That can make cash flow an issue throughout the rest of the year.
If the holiday home is to be rented throughout the year by different visitors, there is a level of tenant management that is required. You’ll need to prepare the property for regular tenants which requires continual upkeep and the use of professional services such a real estate agent to advertise and let the property on your behalf. Regular cleaning as well as renovations, touch-ups or repairs may be required. It’s estimated that the annual maintenance cost for a rental property is around 4-5% of the rental income you receive, where the cost of property management can be as high as 15% of your rental income. It’s also expected that you provide basic household items such as cooking utensils, extra bedding and DVD players.
Have emergency or buffer funds
You’ll need to be prepared for depreciation, a decline in tenants and unforeseen expenses such as maintenance. Wear and tear can cause all sorts of problems throughout the property, not to mention unpredictable changes in the cost of rates and insurance.
Don’t purchase your holiday house during a peak holiday period. You might be looking at a beach house during the summer, but holding off on the purchase until winter will bring costs down. Not only that, you’ll also find that a good house in a good location will still have buyers during the off-peak seasons. Also, be realistic about the costs involved. Many home buyers forget that second homes come with extra expenses such as electricity, water, maintenance and taxes.
Learn about tax benefits
Depending on the type of rental, homeowners may be liable for tax benefits. Deductions for expenses can be claimed when income from the rental property is declared at tax time. When negative-gearing a holiday home, the key is investor focus. Be sure to keep all records and receipts of work done, goods purchased and services provided while the property is tenanted. Even if you don’t rent it out, there are capital gains tax implications when you sell the property in the future. Visit the Australian Taxation Office website for more information.
Consider the long-term benefits
Make sure the property is going to benefit you in the long run. It might be cheaper to rent a holiday home rather than buy one, depending on the factors above. Seek professional advice on depreciation before you venture into a deal and weigh up the pros and cons to make sure you’re making the right decision.