The Australian dream: do holiday homes make good investments?

Imagine the luxury of escaping your hectic city life for a warm and laidback coastal village or your very own mountain retreat, whenever the mood takes you. Holiday homes have long been the ultimate lifestyle dream for many Australians, but are they worth it financially when weighed against what you will have to shell out?

Holiday properties in coastal areas experienced massive growth during the recent property boom, netting their owners huge capital gains. But there are considerable costs involved in owning one. Aside from the initial mortgage, there is ongoing maintenance, any strata fees for apartments, and you effectively double your electricity, phone and gas bills.

If you are in a position to purchase a holiday home, start by considering its location, how often you plan to use it and whether you want to rent it out to supplement your mortgage.

Initial outlay

It's easy to get wrapped up in the romantic notion of your own private getaway, but buying a holiday home does need to be considered as a standalone investment prospect. Capital growth is how you will make money from it in the long term. If you are fortunate enough to be able to keep it solely for your own use, be realistic about the distance it is from your home of residence and how often you will get there. Most experts say that it should be located within 2-3 hours from a capital city. Even if you choose to lease it out, holiday makers will most probably be looking for that type of location too.

Holiday rentals

Holiday rentals often attract high weekend and weekly rents, but are quite volatile. Demand may be high over the Christmas/new year period but can drop off completely during winter. A prime location close to a beach, with facilities like shops, restaurants and other things to do also factor high on a holiday tenant's list. The home will also need to be furnished and there is ongoing maintenance of appliances like fridges and dishwashers to consider. Property management fees can also be quite steep and many holiday tenants will expect extras like cable TV and air conditioning if they are paying top dollar rentals.

Long term tenants

If you want to rent it out for a substantial period of time, finding a permanent tenant could be an option. While this will definitely not draw the same weekly income as holiday leasing, it is far more reliable on a month to month basis. But it does mean you won't get to use the house for some time.

Tax deductions

If your holiday home is an investment property, you can claim expenses for the period you have leased it out for. Bear in mind that if you stay there for say two months of every year, you cannot claim deductions for that period.

Selling

When you are ready to sell, you will have to pay capital gains tax on your holiday home it if it is not your main residence. And do consider that traditionally, properties located away from major cities take longer to sell.

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