Is buying a holiday home a good investment?

If the COVID-19 pandemic has got you longing for a beachside stay or a country retreat, you may have considered purchasing a holiday home to make these dreams a reality. Plus, it’s pretty enticing to think that you could make some extra cash by letting out to other holiday makers too.

But before you snap up that beach house in Noosa, carefully considering whether a holiday house would be a smart investment for you is important. We take you through the key questions you might have if you’re wanting to invest in a holiday home, to help you think about all the pros and cons and make a decision.

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What sort of holiday home should you buy?

In Australia, there’s a huge variety of properties that can be purchased and leased as holiday homes. The first one that comes to mind is probably a standalone house, but apartments, units and even cabins in holiday parks are commonly bought and turned into holiday rentals.

While the type of dwelling isn’t necessarily the most important factor to consider when investing in a holiday home, it's worth thinking about. It’s a good idea to buy a property that is low maintenance so you can minimise costs related to upkeep and repairs.

For example, you might decide to purchase a two bedroom apartment rather than a 4 bedroom standalone house as it would be cheaper and easier to maintain. But, it’s important to make sure that it’d be desirable for you to live in if you’re also wanting to use the home for holidays, or even move in when you retire.

Where should you buy a holiday home?

Location is everything when it comes to buying a holiday home. Almost all holiday houses will generate a good return on investment during peak times (school holidays in Australia), but properties in locations that are less desirable year-round may suffer during the off season.

This is why purchasing a holiday home in a location that has solid amenities available and major infrastructure nearby is a good investing decision, because it means your holiday rental will likely stay rented out for longer. Examples of these sorts of locations include the Coffs Coast in New South Wales, and the Gold Coast in Queensland. However, if you’re also wanting to stay in your holiday home during peak seasons, this will limit the times other people can rent it out for, possibly limiting the investment potential of the home.

These locations also usually have industries other than tourism, meaning they’re more likely to have high demand for rentals and higher rates of capital growth, which is beneficial if you want to sell your holiday home in the future. To ensure higher capital growth, it’s also important that you try and keep your holiday rental for the long term, as this will give the property more time to potentially increase in value.

When should you buy a holiday home?

While the timing of a holiday home purchase will vary depending on your own individual financial situation, it’s best to wait until peak season is over to buy.

This is because supply and demand will dictate the property market that you are looking to buy in, so waiting until the off season can be smart as demand will be lower, which will effectively lower property prices (especially if coupled with high supply).

For example, buying in spring will usually mean there are more properties listed, but you might be able to get a great deal during the quieter cooler months. Property market trends will vary between locations, so it's important to do plenty of research on your desired location.

How should you rent your holiday home out?

With the proliferation of holiday rental company Airbnb in recent years, there are more options when it comes to choosing how you lease your holiday home.

You could opt for a more traditional form of listing by going with the real estate company that manages your property. An advantage of this approach is that these real estate agents will have comprehensive knowledge of the local housing market and how to maximise the time that your home is tenanted.

Alternatively, platforms like Airbnb or Stayz have exploded in popularity, and can often be the first port of call for holiday makers needing a short-term rental. While this makes it likely your property will garner lots of views with a well-crafted listing, Airbnb for example does charge a 3% host service fee which is subtracted from a booking’s total cost.

What are the tax implications of owning a holiday home?

Deductions for expenses associated with earning rental income

If you are choosing to rent out your holiday home, you must declare any rental income on your tax return. But, you’re able to claim a deduction for expenses that are incurred for the purpose of earning this rental income.

These expenses can include interest you pay on the home loan taken out to fund the property, maintenance costs, property management fees and council rates. So, if you’re claiming deductions for these sorts of expenses, you’ll lower the taxable income from your holiday rental, which will lower how much tax you pay.

It’s also important to note that you can only claim tax deductions for the period that the home was rented out or genuinely available for rent. For example, if you advertise your holiday home through a real estate agent but always occupy the home during the school holidays and don’t rent it out at other times of the year due to lack of demand, then this means that you didn’t really have the intention to rent the home out, and it is essentially for private use. But, if you were to rent the house out for 4 weeks in the off season, you could claim deductions for expenses incurred in this period only.

Capital gains tax

Assuming you make a capital gain on the property when you sell it, you will have to pay capital gains tax. However, you qualify for the capital gains tax discount if you’ve held the property for longer than 12 months, meaning you’ll only have to pay tax on half of the capital gain.

Even if you haven’t claimed deductions for expenses related to earning rental income, you’ll still need to keep records of any expenses you incurred through your own private use of the property. This is because these expenses are factored in when working out the capital gain or loss that comes from selling the house.

Land tax

Another tax to consider when weighing up whether to invest in a holiday home is land tax. Land tax is an annual tax that is charged on properties you own that aren’t your primary place of residence, when their total taxable value falls above the land tax threshold. Even if you’re not earning income from your holiday home, you’ll still have to pay this tax. The amount you pay differs depending on which state or territory the property is located in.

Negative gearing

You also may qualify for tax breaks through negative gearing, which is when expenses associated with an asset (in this case, your holiday home) are greater than the income earned from the asset. When a property is negatively geared, you can deduct your loss against other income, like your salary. While negative gearing essentially involves making a loss, it can be advantageous for investors who anticipate that the capital gain from selling a property will offset any losses.

So, while the tax benefits from owning a holiday home can certainly boost its value as an investment, this shouldn’t be the sole reason you choose to invest.

Can I visit my holiday home and rent it out to other holiday makers?

You certainly can! But the way you divide up the time spent at your holiday home between yourself and renters totally depends on your personal preference, and you may want to take into account the implications for your rental income and tax benefits to decide what would work best for you.

It’s also important to note that while one of the perks of a holiday home is being able to have a house fully stocked with appliances, kitchenware, furniture, linen and holiday paraphernalia, this can become tricky if you decide to rent the home out too. This is because tenants will usually expect for these things to be provided for them, meaning you’ll have to factor in the cleaning and maintenance of these items if it’s not just you using them.

How long can I rent my holiday home out for each year?

The number of days you can rent your holiday home out for each year may vary depending on your location in Australia.

It’s important that before you invest, you check the laws that regulate short term rentals in the location you’re purchasing a property in.

For example, in Greater Sydney, investors can only rent out their holiday home for up to 180 days per year.

If you’re wanting some help deciding whether to invest in a holiday home, our experts are available to chat at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.