At this time of the year it is too easy to get carried away with the idea of owning a holiday home. After forking out thousands of dollars to rent even a modest house or apartment by the beach in January, the prospect of being able to regularly wake up next to a shimmering blue sea in your own bed is hard to beat.
Indeed holidaymakers who own rather than rent a beach house happily wax lyrical about the joys of having a home away from home, a place where they can forget about the real world wrapped up in their own surroundings and without the need to cart their wardrobe up and down the highway.
Many people underestimate the running costs of a beach house. There are the costs associated with running a beach house, as well as the physical challenges of maintaining a house that is a couple of hours' drive away.
"Pay close attention to the costs," says Nathan Lear, a financial planner at Hewison Wealth.
"Many people underestimate the running costs to maintain a second property, such as general maintenance. If the dishwasher packs it in, from where will you fund this?" he says.
"People often don't realise the costs until the bills start rolling in," says Paul Nugent, a director at Wakelin Property Advisory.
Lear says it is critical that potential holiday home buyers understand their objective. Will the holiday property be exclusively for personal use? Is it an investment? Or is it a combination of the two?
If the property is an investment, the metrics need to stack up. Individuals need to understand the likely rental return and costs. To maximise returns, says Lear, the property should be purchased in a popular holiday location with good capital growth prospects.
Nugent says investors can expect beach houses, if they are bought well, to double in value over an eight to 10-year period. This represents similar capital gain potential to properties in the major capital cities, but the gains on coastal properties are far less consistent, warns Nugent.
In terms of rental incomes, individual markets can work quite differently. "You need to do the research and understand the market. Speak to locals and real estate agents," Lear recommends.
As a general rule, says Nugent, the rental yield will be about the same regardless of whether the property is rented long term or is placed on the holiday rental market.
Individuals also need to consider the tax implications of investment properties. In his final word on the subject of buying beach properties as investments, Nugent's advice is: don't do it.
Properties for personal use
Beach houses and apartments are great for personal use, but would-be buyers need to understand what they are getting themselves in to.
The biggest expense is often the mortgage, which owners should expect to rise over time.
Other costs can seem endless: insurance, land tax, council rates, utilities, gardening and perhaps security – all in addition to the cost of having extra sets of clothes, linen and towels, and fitting out another house with furniture.
On top of these expenses is maintenance; Lear suggests keeping a contingency fund.
In the case of holiday homes that are intended for both personal use and investment. Have a clear understanding of how much of the year it would be rented and over what periods. These decisions can affect the income return you generate.
Lear says ideally the owner should try to generate sufficient rental income to cover the outgoings. "This way it isn't costing you anything and any capital growth on top is a bonus," he adds.
By SALLY PRATTEN
- This story first appeared in the Australian Financial review.