Imagine waking up in a cosy mountain retreat or in a beach shack overlooking the ocean – all in your very own holiday home. Sounds dreamy, right?
Whether you’re after a sea change, a tree change, or simply a place to unwind, investing in a holiday home can be an attractive way to diversify your property portfolio and create a retreat to escape to.
But before you turn this dream into a reality, here are a few reality checks you may need to consider before you dive in.
Plan how you’ll use it
Start by thinking about how often you’ll use the property and when. Your plans for personal use versus renting it out will have a big impact on your finances and potential returns.
Keep in mind that peak tourism periods, like summer for waterfront properties, often bring in the highest rental returns, which might mean forfeiting plans to stay there during those times.
Also, do your research to understand whether other holiday homes tend to rent out seasonally or year-round, as this will affect your income and budgeting.
Research the market thoroughly
As with any property purchase, it’s imperative you do your homework before purchasing a holiday home.
What’s the supply versus the demand like for holiday rentals?
Get to know the local tourism scene and holiday rental market. Will you have to rely on seasonal crowds, and if so, how will you cover costs during quieter times?
Check for capital growth indicators in the local area. It’s a good idea to choose locations that provide access to amenities such as shops, cafes and public transport. Check whether there are any infrastructure upgrades in the pipeline, as this could impact the property’s capital growth potential.
Check the local laws, rules and regulations
You’ll want to get your head around the local requirements for short-term rental accommodation. Regulations vary around the country.
Some areas may have restrictions on short-term holiday letting, or you may need to register the property to operate a short-term rental.
There may also be limits on how long you can live in the holiday home, as well as minimum standards of behaviour and requirements. Local councils may have laws (such as fire safety, noise control, parking or overcrowding) that could affect your holiday home.
There could also be other things like levies to consider. In Victoria, for example, a short-stay levy of 7.5% applies for bookings of less than 28 consecutive days.
Bottom line: do your research and understand your obligations.
Understand the financial implications
You’ll need to be able to cover the ongoing costs of owning a holiday home. Examples include:
- Mortgage repayments
- Council rates
- Home insurance
- Public liability insurance
- Cleaning fees
- Maintenance costs
It’s important to be aware of the tax implications of owning a holiday home and to chat through these with your accountant or financial planner.
Examples of financial implications to consider:
Tax deductions – You can claim tax deductions for expenses associated with earning rental income (interest on the home loan, maintenance costs, etc.), but only to the extent the home is rented out or genuinely available for rent. See the ATO’s holiday homes page.
Negative gearing – If the property’s costs are greater than the income it produces, you may qualify for tax breaks through negative gearing. This means you can deduct any losses against other income, like your salary, wages or business income.
Capital gains tax – You may be subject to capital gains tax when you sell, assuming you make a gain. If you own the property for more than 12 months, however, you may qualify for the capital gains tax discount, meaning 50 per cent of the gain is tax-exempt.
Stamp duty and land tax obligations.
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