It’s easy to understand the appeal of a holiday home.
It seems an ideal situation to have a property in a holiday town you love and can regularly visit while other holiday makers lease it out at other times, helping you pay off the mortgage on your investment.
But are holiday homes really a good investment?
Let’s take a look at the pros and cons of this popular property choice.
In addition to the obvious lifestyle benefits of owning a holiday home, the other main advantages relate to the taxation benefits and extra cash flow.
Extra cash flow
By leasing the property out to other holiday makers on a short term basis, the owner will have extra funds that can be put towards mortgage repayments, land fees and general upkeep of the property, which is less money out of their own pocket.
The principles that apply to a rental property also apply to a holiday home if it is rented out –meaning owners can take advantage of tax benefits such as negative gearing and depreciation.
Holiday rental property owners often assume that because they are personally using their property, depreciation cannot be claimed. This can lead to investors missing out on thousands of dollars in lost deductions annually. The owner of the property can still claim depreciation for any periods of time it is untenanted so long as it is available for rent. However, depreciation cannot be claimed during the portion of the year the property is used for personal use, meaning it can only be claimed on a pro-rata basis.
In addition to claiming depreciation on both capital works and the plant and equipment* within the property, holiday home owners can also claim extra deductions from a furnished property. They can claim depreciation on everything from couches to televisions and mattresses. Investors who are considering purchasing a holiday home or have already done so should seek advice from a specialist Quantity Surveyor such as BMT Tax Depreciation to find out what deductions they are able to claim.
Higher weekly rental yields
The rent charged on holiday homes per night or week is typically higher than the rent from a traditional residential lease for the same period. If the owner can manage to lease the property out for most of the year, this could see them with higher rental returns than from a traditional investment.
Despite the optimism many holiday home owners portray with this type of property purchase, they might later find that the hidden costs and downsides sometimes outweigh the advantages listed above.
Understanding the tax implications
In order to qualify for the tax benefits available, the holiday home owner must make sure the property is genuinely available to rent and does not have unrealistic rent conditions imposed on it. Visit the Australian Taxation Office website for a full breakdown of these conditions and guidelines.
Holiday home owners can only make claims for depreciation and other tax benefits on a pro rata basis. This often calls for meticulous record keeping to ensure they have all the relevant figures and dates to qualify for these tax concessions.
There are several costs associated with owning a holiday rental. There are property management fees, which are usually higher than for standard rental properties due to the higher turn around and greater amount of work involved. There are also costs for short stay insurance, land tax, advertising fees, regular cleaning, general maintenance and holding costs.
Prolonged vacancies in the off-season
With a short-term rental in a holiday location owners risk prolonged periods of vacancy, particularly in the off-season. This may mean they won’t be getting the returns originally imagined and could be paying ongoing costs out of their own pocket.
A higher turnover of guests may lead to damage to the property and faster wear and tear.
Lack of capital growth
In holiday destinations, capital growth is often more unpredictable than in city locations, meaning the owner may not get a profit when it comes time to sell one day. Furthermore, there are risks to buying in a one industry town – such as a tourist town. If there is a downturn in this industry, there may be no other reason for guests to come, which could make the property hard to lease out.
While the owner might plan to take advantage of the home as a regular holiday destination, they may not be able to visit at the times they wish. The property is likely to be most in demand during peak holiday times, meaning the owner may have to visit in the off-season or less desirable times.
When it comes time to sell, the owner may be subject to the Capital Gains Tax.
Sharing your home
A holiday home owner may find they are limited in terms of decorating the place, leaving personal items there and making it a secondary ‘home’. They might have to style the house to please a range of holiday makers, as opposed to personal preference. Also, they must question how they feel about having a constant stream of strangers sleeping in their bed and using their space.
Tips for buying a holiday home
- Don’t purchase on emotion or a whim. Do your research, understand the local market and treat it like any other investment.
- Make thorough calculations prior to any purchase to understand the realistic returns. Calculate the returns you are likely to see for the whole year, not just in the peak holiday period. Also take into account realistic figures for insurance, depreciation, property management fees and land taxes.
- Seek professional advice. Before diving in and purchasing a holiday home, investors should seek advice from relevant professionals such as a Property Manager, an Accountant, a Financial Advisor and a Quantity Surveyor.
*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. Investors should note that these changes are not yet law, as the legislation still needs to be passed through the senate for confirmation. BMT Tax Depreciation remain in discussion with government around the new changes and will keep our clients informed on the outcome. To learn more visit www.bmtqs.com.au/budget-2017.