Holiday season is a peak time to consider buying a coastal or country retreat. It appears to make sense: rather than renting a house in an area you come to frequently to relax, why not buy one that you can use anytime?
Holiday season is a peak time to consider buying a coastal or country retreat. It appears to make sense: rather than renting a house in an area you come to frequently to relax, why not buy one that you can use anytime? As with most things, the reality can be a little different, so here are some tips to help you avoid the pitfalls.
Work out what you want
Do you want a holiday home that is going to sit vacant until you and your family use it, or do you want to rent it out for most of the year? Do you want your friends to use it and if so, will you be charging them rent when they do? Your decision here will affect your tax obligations.
Do your research
If your holiday home is going to be more of an investment for you, you need to do a bit of research about the area you’re thinking of buying in. This doesn’t mean just checking out the local shops. It requires carrying out research into occupancy rates and rental returns.
Choose your destination
Generally the best location for holiday homes are within a two-hour drive from major cities – something that isn’t too far away if someone is leaving on a Friday night to get to it after a busy working week.
If you intend to rent out your holiday home, you also need to make sure the town has all the facilities that a holidaymaker expects. These days at the very least they expect a reliable internet connection and a decent selection of shops and cafes.
What are your rental options?
There are two main rental options: leasing it to a permanent tenant or renting it out only during holiday and peak periods.
With the first option, you obviously won’t be able to stay there whenever you feel like it. The rental yield is also likely to be lower. The advantage of having permanent tenants, however, is that they can cover the mortgage.
The second option – holiday letting – means you may find your property is unavailable for you to stay in at the times when you really want to. And while a holiday rental does attract a higher rent, the management fees and maintenance costs are also higher due to the higher turnover of tenants.
Understand your deductions
The deductions you can claim for will depend on your use of the property. If it’s fully rented, then generally holiday homes attract similar deductions to other types of investment properties.
However, if you intend to use the house yourself at certain times of the year, the amount you can claim will vary. You will be able to offset some of your expenses against assessable income but not all.
Make sure you see your accountant or financial planner to fully understand all the tax implications of owning a holiday home.
Financing your holiday home
If you are still paying off your home loan, it’s likely you will need to take out a second mortgage to purchase your holiday home. If you’ve built up some equity in your home loan, you may be able to release this as a deposit.
Be aware that the amount you can borrow for your second mortgage will depend on your overall financial position and will take into consideration your first mortgage and any other personal loans or credit card debt.
Your lender will take into account the deposit you have available as well as any potential rental income from the holiday home when it works out what it is prepared to lend you.
Lenders have online calculators that can help you work out how much you can borrow, such as the one found on iMortgage’s website which will provide you with a rough guide.
Use your head
While owning a holiday house always seems to make sense when you are on holiday, remember that there are a number of pitfalls, especially if you’re viewing it as an investment.
If you intend to pay for it by renting it out, there is the danger that you won’t get a tenant and it will be vacant for long periods of time. Alternatively if you are buying it for capital growth, remember that many coastal towns have suffered slow and in many cases negative capital growth over time.
A holiday home can be a great purchase but remember the decision needs to be made with your head, not your heart.