Buy a holiday house that pays for itself

Dreaming of a holiday house? Wanting to turn your holiday house into a cash cow when you’re not there?

You’re not the first one to think it.

John McGrath who writes on the small business and retail specialist page, switzer.com.au, says this:

“Holiday homes have become a luxury that many people could not afford during the recent financial crisis, with many forcing to sell their coastal retreats and investments. This resulted in an oversupply in Australia’s coastal markets and prices have softened significantly in the last year.”

So perhaps it is time to make this dream come true. But how careful do you have to be?

Our resident finance guru, David Koch says this on his blog: “Is this holiday property going to be a rental property or do you want to use it? Because trying to do both can be very difficult and end up being very expensive.”

Related: What is Negative Gearing?

The main crux of this “having your cake and eat it too” issue is that rental demand for your holiday home outside the holiday period can be scarce. Moreover, if you want to be at your holiday house during the holidays, that potentially defeats the purpose of getting a return for your investment.

What can you do to be economically better off from this venture, and still wake up to waves crashing outside your bedroom window?

Potential buyers need to consider the following:

Rental returns can and do fluctuate widely for holiday homes.

In many coastal spots, the average period of strong demand for holiday rentals is 8 to 10 weeks a year with demand plummeting during winter, particularly in Australia’s southern states. Therefore it is important to ensure you create a cash flow financial plan so you can make sure you service the loan or repayments.

Capital growth is generally strongest in towns with year-round tourist appeal and a well-established economic base.

A good way of identifying holiday home hotspots is by looking at popular online booking sites for highly sought after destinations.

Demand is more consistent for holiday properties in warmer locations but only for prime properties.

Proximity to the beach and a sea view make a big difference when it comes to success with holiday letting.

But ponder this: Even in boom times, regional and coastal properties generally take longer to sell than their metropolitan counterparts.

Related: Banks vs Credit Unions: what's the diff?

House or apartment?

John McGrath recommends houses over apartments for investment because land value appreciates at a faster pace over the long term.

However, if you are looking for a cheap property to use as a holiday home, while still achieving decent capital growth, then something like coastal apartments are a great option.

Also, as you retire, you might want a smaller property, so think long term.

Consider the tax implications if you are intending personal use of your property.

While there is some consolation in negatively gearing the property, don’t see this is a saving grace especially if you are planning to use the property at times for your own holiday.

The more times it is used by you, the smaller the tax deductions get. Of course if you want to use the house as well as rent it out, then you’ll obviously not be able to go during the peak holiday periods.

Property maintenance costs can be higher.

Multiple tenancies in peak holiday periods mean holiday homes have high maintenance and property management costs.

Finally, if you are a member of an eligible super fund or union (over 5 million Australians are), you may want to get hold of the Greater Building Society Discounted Ultimate Home Loan Investment Package because at just 4.74% p.a. (variable comparison rate 5.12% as at 19th Sept 2014), you can save more on interest and therefore get a higher return on your potential holiday home buy.

Top home loan rates this month:

• 4.54% p.a. (4.57% comp) - Loans.com.au

• 4.59% p.a. (4.78% comp) - State Custodians

• 4.60% p.a. (4.61% comp) - Bank mecu

Rates are current as at 19/09/2014

All up, do your homework and remember that if you are tight on cash, buying a holiday home, particularly on top of your own main abode, may not be the most prudent method to increase your wealth.

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