Why a Holiday Home Isn’t Necessarily a Good Investment Property

Owning a holiday home in a picturesque location is an appealing idea for many, offering the allure of a personal retreat and potential financial benefits. However, when it comes to purchasing a holiday home as an investment, the reality can be more complex than anticipated.

While a holiday home can be a valuable lifestyle asset, it’s important to carefully consider the financial implications before making a decision.

Understanding the Difference Between Lifestyle and Investment

When thinking about purchasing a holiday home, it’s important to distinguish between a lifestyle purchase and an investment. If the primary goal is personal enjoyment—a place to escape with family and friends—then the financial returns might not be your primary concern. In this scenario, the decision revolves around how much you value having your own holiday spot versus the associated costs.

However, the situation becomes more complex if you’re also expecting the property to generate income through rentals. While rental income can help offset costs, it may not be as consistent as you might hope. Factors such as seasonal demand, ongoing maintenance, and potential regulatory changes can all impact the profitability of a holiday home.

The Financial Aspects of Owning a Holiday Home

Beyond the initial purchase price, owning a holiday home comes with ongoing expenses like mortgage repayments, insurance, council rates, and utility bills. If you plan to rent out the property, you’ll also need to consider management fees, cleaning, and maintenance costs, which can quickly add up.

A key consideration is that the peak times for rental income—such as school holidays and long weekends—are often when you’ll want to use the property yourself. This creates a dilemma…

Should you prioritise personal use or focus on maximising rental income?

Finding the right balance can be challenging and impact your enjoyment and your financial return.

Market Fluctuations and Regulatory Considerations

The value of holiday homes tends to be more volatile compared to primary residences. Highly desirable locations during strong economic periods may face significant declines during downturns. For example, after the Global Financial Crisis, some properties in Noosa experienced a sharp drop in value, with losses of nearly a third. This kind of volatility poses a risk if you’re relying on the property’s appreciation as part of your investment strategy.

Recent regulatory changes in Australia are also making it more complicated to depend on short-term rentals for income. Local councils and state governments are introducing levies and restrictions on short-term rentals, which could reduce your rental income and impact the overall appeal of the investment.

Key Considerations Before Buying a Holiday Home

Before purchasing a holiday home, it’s important to think about the following:

1. Seasonal Demand

Holiday homes often have fluctuating demand, depending on the time of year and broader economic conditions. Are you prepared for periods of low rental demand or potential financial loss?

2. Maintenance and Management

Owning a holiday home requires ongoing maintenance and management, especially if you plan to rent it out. Consider whether you’re ready to take on these additional responsibilities.

3. Usage

Realistically assess how often you will use the property. If your schedule is busy, you may only have time to use it during peak periods, which are also the most lucrative rental periods.

4. Location and Accessibility

The closer the holiday home is to your primary residence, the more likely you are to use it. However, proximity often comes with a higher purchase price, which could impact your overall investment strategy.

5. Regulatory Environment

Stay informed about local and state regulations that could affect your ability to rent out the property and its financial viability as an investment.

Is a Holiday Home the Right Investment for You?

A holiday home might be a reasonable lifestyle choice for those with significant financial resources—such as at least $5 million outside of super. However, the financial risks may outweigh the benefits for individuals with more modest incomes, particularly those earning less than $200,000 annually. The appeal of owning a holiday retreat can quickly diminish if the investment doesn’t perform as expected.

If you’re considering a holiday home primarily as an investment, it’s important to evaluate the potential challenges and risks. At Collective Wealth Advisers, we can help you assess whether this type of purchase aligns with your financial goals and explore alternative investment strategies that may better suit your investment and retirement goals.

Contact one of our advisers, and let’s tackle today and tomorrow, together.