For those planning to invest in property, a holiday home is often an enticing idea.
Not only do you get the rewards of an investment property, but there are certain lifestyle perks that come with a holiday home investment as opposed to a traditional rental. Namely, you get to stay in the property in your favourite holiday location when it’s not being rented out.
It’s a win-win situation, right?
Such considerations often lead would-be investors to question whether they would be better off investing in a holiday home or a regular rental.
Here we outline the pros and cons of each approach.
Holiday home advantages
There are major lifestyle advantages to this approach. You’ll own your very own home in a holiday location which you can stay in yourself, but still earn money from it by leasing it out when you’re not there.
Another major benefit is that typically, a holiday rental will deliver highly weekly yields than a regular rental in a non-holiday location, especially during peak holiday season for that area.
Finally, holiday home owners will still be able to take advantage of depreciation deductions for the period of time when the property was genuinely available for lease (that is, those periods when the owner wasn’t using the property themselves).
Holiday home disadvantages
Before you start house hunting in your favourite holiday location, there are some downsides to this approach that need to be considered too.
Firstly, the higher turnover of tenants generally leads to more stress and uncertainly for the owner and more wear and tear on the property. The property will also require more general upkeep between tenants.
There may be greater periods of vacancy, especially if it’s in an area that thrives in holiday season but is fairly quiet for the rest of the year. For this reason it may not be as reliable or consistent as a regular rental.
Furthermore, detailed record keeping is required if you wish to take advantage of tax deductions such as deprecation, as you’ll need to know precise dates of when the property was tenanted or available for rent and when you stayed there yourself.
As you’ll likely have an emotional attachment to the property if you’re using it yourself, you’ll have to get used to others living in your space when you’re not there. For this reason you’d also have to be careful about leaving any personal belongings or valuables there.
Finally, keep in mind that people will generally want to rent the place during peak holiday time. This means that if you actually want to make money from your property you might have to go there at less busy times of year, when the area may be lacking some of the appeal that originally attracted you.
Traditional rental advantages
This option generally offers more stability and consistency in terms of both cash flow and having the property tenanted, as it’s not so dependent on seasonal movements.
There are typically less periods of vacancy, there is less wear and tear on the property and property management fees are generally lower.
There is also the opportunity for greater capital growth as you can invest in up and coming areas and not be limited to already established holiday destinations, which may have already plateaued in terms of capital growth.
Finally, as you’ll be able to make a full year claim, you’ll realise the benefits of depreciation more. Your depreciation deductions and cash return will be greater than if you only made a partial year claim, as you would do for a holiday home you stay in yourself.
Traditional rental disadvantages
The downsides of this approach are typically lower weekly rental yields and the fact that you can’t make use of the property yourself as you wish…it’s purely business and purely an investment.
And you’ll still have to pay to stay in a hotel in your holiday spot of choice!
Making a decision
So which option should you choose?
As always it comes down to individual strategy and what you most want to achieve from your investment property. This is something your Financial Advisor or Accountant will be able to assist with further.
To help with your decision making, you can read more about investing in holiday homes here.