There’s no doubt a holiday home is great for an escape - there’s no better place to wind down after a long day/week/month in the bustling city. Whether you’re thinking about purchasing a holiday home for yourself or you’re looking at generating cash flow, the reality can be a little different.

So, here are some tips to help you avoid the pitfalls of buying a holiday home.

What are you using the holiday home for?

When buying a holiday home, you need to decide your main motivation.

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 (more on that later) and will also influence where you buy, what kind of property, and how much you spend.

If you are looking to make a profit out of your holiday home during the year, it’s important to research other rentals in the area to see how much they charge. Rental websites such as Airbnb and Stayz will point you in the right direction.

Not only this, but there may be regulations and fees associated with short term rentals in your state. Be sure to check out each region's specific rental laws before you purchase, especially if you are investing in a holiday house interstate.

Choosing your destination

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. Consider the areas that have high rental yields along with all the must haves holiday goers love such as beach views/access, and proximity to a selection of cafes, restaurants, shopping centres, and local tourist hotspots.

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. 

However, if you’re buying a holiday home purely for your own use than you have free rein to choose a location most desirable for you - close to relatives, sentimental value, etc. Remember, you’ll be reliable for paying off two mortgages at once.

What happens in the off season?

Whether you’re using your holiday home occasionally, as a regular weekend getaway, or planning on renting it out for short term periods, you need to consider the off season.

If your holiday home is left vacant during the off season (i.e. unable to earn rental income), you will need to maintain the costs of two mortgages. For example, if you plan on buying a beach house and using it for yourself in the summer but decide to rent it out in the winter, it may not generate that much income as demand for that area will likely plummet. After all, how many of us Aussies really go swimming in the winter? If you’re relying on rental income to pay off the mortgage, this could be a sticky situation.

So, keep in mind that if you’re looking to rent out a holiday home practically full-time, you may need to buy in a region that is attractive to tenants all year round as rental returns can fluctuate.

Consider the tax arrangements

The deductions you can claim for tax 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.

According to the ATO:

  • If you own a holiday home and don't rent out the property, you don't include anything in your tax return until you sell it. When you sell the property, you’ll need to calculate your capital gain or loss.

  • If your holiday home is rented out, you need to include the rental income you receive as income in your tax return. You can claim expenses for the property based on the extent that they are incurred for the purpose of producing rental income.

  • You will need to apportion your expenses if:

    • your property is genuinely available for rent for only part of the year

    • your property is used for private purposes for part of the year

    • only part of your property is used to earn rent

    • you charge less than market rent to family or friends to use the property

Be aware that if you decide to use your property for your own pleasure for part of the year and then operate it as an investment property for the rest of the time, you’ll need to convince the ATO that the property is a genuine investment.

If you’re unsure, talk to an accountant or financial planner to fully understand all the tax implications of owning a holiday home. 

The extra costs

Along with the mortgage repayments (which may or may not be covered by you), there are additional costs to consider with a holiday home:

  • Property management fees

  • Maintenance costs e.g. pool, garden

  • Body corporate fees

  • Cleaning fees

  • Insurance to cover damage to your property by tenants

  • Insurance that covers natural disasters e.g. flooding from rivers or the sea, particularly in coastal areas

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 also take into account the deposit you have available as well as any potential rental income you may earn from the holiday home when determining how much it is prepared to lend you. 

A holiday home can be a great purchase but remember the decision needs to be made with your head, not your heart. Use our rent or buy calculator to help you decide and be aware of the costs.