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Your Piece of Paradise – Buying Holiday Houses

Holidays are just around the corner and once again, as you wander past the real estate agent in your chosen holiday location, you can’t help but take a peek at what’s on offer. The temptation of buying a holiday house presents itself to us all at this time of year, but what do you need to take into consideration if you are serious about buying a holiday house?

Purpose

The most important thing when buying a new property is thinking about your motivation and goals for buying. Is the holiday house going to be for personal use, will it form part of your super fund investments and/or is it going to be an investment property? Depending on what you want to achieve in the purchase of the property, you need to consider different issues.

If you are buying primarily for personal use, you should consider how frequently you will use the property. Will the property most likely be rented out at the times when you want to use it? You should also think about whether you want to commit to holidaying in the same location each year, rather than having the flexibility to choose different locations. And how far away is it from where you live most of the time? If it’s more than 2 hours away, you are unlikely to get there all that often.

If the property is primarily for investment purposes then you will need to consider the location and proximity to value-adding services – Is the property in a growth area, is it easily accessible? Does it have close access to shops, transport, entertainment and food supplies?

You should consider whether a holiday home is the best investment option for you and whether it will give you the best return. You may have two options as an investor: to lease the property to a permanent tenant or to let the property as a holiday rental – for a higher rent during peak periods. The first option generally attracts a lower yield and you can’t use the property while the lease is active. The second option means you can’t use it when you most want it, namely Christmas and Easter. Holiday homes are usually rented short-term and there is not as much stability as with long-term rentals. In addition, the property will most likely spend some of the quieter (winter) months unoccupied. You should also consider the expenses involved such as rates, taxes, water, electricity, cleaning, maintenance, advertising, insurance and real estate fees.

However, in addition to the potential lifestyle benefits, a holiday home can also provide significant financial benefits while it is not being used. For example, you can advertise your property for rent when you are not using it and negatively gear your expenses during this time. Your financial adviser can give you detailed information on the tax and financial implications of owing a holiday home.

Legal issues

If you are going to rent the property, you will need 100% building and contents cover, public liability insurance for renters in your property, and possibly short-stay insurance cover.

This covers your loss of rent if there is damage to the property, for example if the house is booked out for five weeks, but the renters in the first week cause damage, you may not be able to rent it out for the remaining time and you may have to find alternative accommodation or refund money to the other holiday renters.

Other considerations

Also important is the current or previous use of the house, at the time of purchase. If the property is a holiday rental and is being advertised for rent, it may have forward bookings. You will need to take this into consideration when ownership changes.

We are able to add special conditions to contracts for sale so that purchasers are aware that a given property is a holiday rental and that there may be forward bookings.

You may also want to think about the future resale value of the property. Many retirees opt for a beachside retirement home, and considerations such as accessibility, access to services and location are significant for these buyers.

The present market

At the peak of the global financial crisis, many were forced to sell off their holiday homes due to major losses on the share market. This resulted in an oversupply in Australia’s major coastal markets and prices fell significantly.

We’re now just starting to see the turnaround with RP Data reporting a 37 per cent rise in the number of homes sold in Australia’s most popular coastal locations over the past year. Much of this can be attributed to rising confidence in the Australian economy and a renewed faith in property among investors.

However, monthly sales volumes are still well off the 10-year average, indicating it’s still a buyers’ market in these popular lifestyle and holiday areas.

Holiday homes can be extremely rewarding in terms of both lifestyle and investment, and with a little research and planning, you too can make the dream of buying a holiday home a reality.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal legal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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