While you’re there the blue sky dreaming sets in. You find yourself staring at the windows of realtors and the discussions of whether you should purchase your own holiday home begin to feel more and more real.

But how far do you let the dream go?

If you’re serious about purchasing a holiday house of your own you might want to consider the below:
 

Have clear objectives as to how you will use the property

1. Exclusively for personal use
2. Exclusively as an investment (financial asset)
3. Or a combination of both

It is extremely important to understand the objective of the property from the outset as this can dictate the type of property that you purchase.

1. A holiday home purely for personal use

The property would not be generating any rental income so there would be a financial cost or an opportunity cost for owning this property.

• Financial cost:
  Let’s assume a holiday house was purchased for $500,000 including costs. If the full amount was borrowed with a bank loan at current interest rates of say 5%, it would cost you $25,000 per annum in loan interest. This is in addition to all outgoings e.g. council rates, insurance, utilities, land tax (if applicable) etc. In this example the property could cost you perhaps $30,000 to $35,000 per annum in total to maintain. Obviously, you would hope to see capital growth over time to offset these costs, nevertheless, it would be a cash flow burden.

• Opportunity cost:
  If you have the capital available to purchase the property, consider the opportunity cost. That is, if you didn’t purchase this property, what else could you be doing with this money to make it work for you? Understand the likely return profile for this property. (If it is a lifestyle asset this may not be an important consideration.)

2.  A holiday house as an investment property

Like any investment decision, analysis should be undertaken to determine whether the investment metrics stack up. Understand the likely rental return and associated costs. The last thing you want is for the property to turn into a money pit. If your mindset is to buy as an investment, you should be looking at it from the point of view as an investor, without the emotion. To maximise rental income the property should be purchased in a popular holiday location with capital growth prospects.

3.  A holiday home for personal use & as an investment property

Clear parameters should be set, which can be tricky. Have a clear understanding of how much of the year would it be rented and over what periods. For example, if it is a beach house, would you rent it over the peak holiday season period in summer when it would achieve the highest level of rent or would you want to make personal use of the property over this period? These decisions can significantly affect the income return you generate.

If the property is used as a hybrid, with part personal use and part rental, the ideal situation is to have it generating enough rental income to cover outgoings (loan interest, bills etc.). This way it isn’t costing you anything and any capital growth on top is a bonus.

If considering the purchase of a holiday house, here are a few other things to consider:

• Tax – understand that income earned is assessable and subject to income tax at your marginal rates.

• Tax deductions – depending on what portion of the year the property is rented out or made available for rent, the interest costs are tax deductible providing a tax benefit, which may significantly reduce the after-tax costs.

• Understands the costs – costs can add up. If purchasing a property go into it with open eyes and fully understand the costs. Many people underestimate the running costs to maintain a second property, such as general maintenance. If the dishwaters packs it in, from where will you fund this? Other hidden costs could be things such as paying a cleaner if you are using the property as a short-term rental and need it cleaned in between stays, that is if you don’t plan on doing the cleaning yourself.

• If it’s a holiday house are you happy to holiday at the same location? This may or may not appeal to people.

• Understand worst case scenarios – for example what would be the cash flow impact if purchased with debt and interest rates sharply increased or you had a period where you struggled to rent out the property?

• Do your research – like any major investment decision or purchase, do your research. Understand the market you are buying into. Spend some time in the area you’re planning to buy – preferably during different periods such as summer and winter. Speak to real estate agents and locals to get a better understanding of the market and look out for anything that you may be unaware of.

The purchase of a holiday house can be very rewarding, with many years of enjoyment that you can share with loved ones. Define your objectives, do your research and if it all stacks up then chase your holiday home dream.

If this article has set your blue sky dreaming soaring you might want to tune into the Money Mentors Podcast (with Nathan Lear & Glenn Fairbairn) Epsisode #10 as they discuss the topic of purchasing a holiday home. 

If you’d like assistance in the decision of whether to take the plunge and purchase a holiday home, a financial adviser at Hewison Private Wealth can help.

Hewison Private Wealth is a Melbourne based independent financial advice firm. Our financial advisers are highly qualified wealth managers and financial planners. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email [email protected] or visit www.hewison.com.au

Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.