Thinking about purchasing a property for holiday rentals? The cost of doing so might be more than you think. With the variability of holiday rentals, limited growth in holiday areas, costs of professional management and tax implications, holiday rentals might not be such a smart move.
It seems like such a good idea at the time. You’ve just travelled domestically to a lovely beachside area, maybe made a few friends from the area. Why not purchase a property there? Well 9 times out of 10 that decision is going to set in place a landslide of problems and costs that could make that first holiday nothing but a bad memory.
First let’s talk about the main problem with holiday rentals, actually getting people into your property. Unless you are on a site like Stayz or AirBnB you are going to need a property manager to advertise your property and get people interested. 18-20% of rental revenue is standard holiday rental management costs, less for long term holiday rental periods. So you’re probably thinking you’d want to self-manage the property, after all 20% is a massive amount to be losing.
What’s the problem with self-management? If you don’t live near the property and/or are time poor then it’s going to be extremely difficult. Think about all of the time involved with organising cleaners, electricians, plumbers, how do you know they even did their job if you don’t check? Now add on the finance side of owning the property. Are you going to rent out your property short or long term? What kind of margins are you working with? How much do you then need to charge? Is that competitive with other properties in the area? How many days of the year will the property actually be rented?
Property has got a lot of moving parts and if you aren’t familiar with how they all come together you could face some serious problems.
Now let’s talk about actually choosing a property. Where would you buy a holiday rental? Most Australians would think about a quiet, secluded spot on the coast. But for the most part this is an awful choice. What happens when you need to sell the property? Who is going to buy it, and for what price? The capital gains that can be made in very rural areas are extremely low, so expect to sell the property for around the same price you buy it for.
Oh, and remember those costs we were talking about before?
Of course it’s not all bad. In the same way that any investment property can be negatively geared to reduce tax on a property that costs more than it earns, rental properties have similar benefits. If the interest expenses for the property are greater than the rental income, tax deductions can be granted. Another more obvious benefit is that you have a home to holiday at. But realistically, unless you are going to the same place for a couple of weeks every year, it just wouldn’t be worth the cost.
The costs of owning a holiday property are no laughing matter, and when you consider that it’s not an easy business keeping a house full of people all year round, the problem becomes even more difficult. It’s probably worth getting a property manager to look after your home, but what about all of that income the property would otherwise make? Wouldn’t it be much smarter to have a property that is always full, and one you don’t have to worry about filling all of the time?