Why I will never buy a holiday house - March 2020
March 11, 2020 / Written by Rich Harvey
Whether through personal experience or pop culture references, we know that holiday romances are thrilling and exciting in the moment.
It’s new. It’s unexpected. It’s wonderful. And it happens in an entirely unknown setting where anything is possible.
But holiday romances rarely end well. You either return to normal life at the end of summer and never see that flame again, or you try to make things work and realise that the holiday destination is a vastly different reality to your own.
Holiday homes are kind of the same, in my view. You go to a small country town or a beautiful seaside location, look in the window of a real estate shop, and begin to daydream.
It’s romantic – the notion of having a little weekender, somewhere to come for weeks at a time, somewhere to bring the kids, a couple’s getaway, whatever.
But beneath the postcard perfect daydream can be a real nightmare. A costly, potentially pointless nightmare.
Shocking cash flow
You discover a nice spot, you love the place, and so you figure... why wouldn’t everyone else?
It makes sense. And while the area you’re fawning over might indeed be popular with others, it’s probably only in demand for three or four months of the year.
Peak periods for holiday destinations tend to be December and January. While there’s a decent shoulder either side, consider that people go back to work and kids return to school.
Those strong yields you’ve anticipated don’t last for long and suddenly you’re left with an asset that’s sitting empty for most of the year, not earning an income.
That can burn a hole in your pocket if you’ve paid a premium, as most investors do in markets they’re not familiar with.
Maintenance costs can also be extraordinary, reducing what money do you bring in over the course of a year. Just think of having to pay a cleaner after every guest, plus staying on top of any repairs that need to be made. Booking commissions or management fees are hefty too.
And competition is tight. With Airbnb and other platforms, everyone can have a ‘holiday investment’ and locals in these sought-after locations and cashing in.
Flat capital growth
Everyone watched over the past decade as people took huge hits by overpaying for properties that suddenly no one wanted – or not for the amount they’d shelled out – when the industry slumped.
Any location that’s reliant on a single economy is to be treated with suspicion. Tourism is absolutely no different.
It’s for that reason that holiday markets offer pretty poor long-term capital growth prospects for investors. There’s only one thing that keeps things ticking over, and it’s a pretty volatile industry.
More than that, smaller populations mean more contained demand that is often outpaced by supply. There’s no motivator for price growth.
Of course, there are markets that have the best of both worlds – good economies, good services, good links to other major markets, good long-term prospects and a bit of a holiday vibe. I’m thinking Newcastle, for example.
But if your daydream holiday investment is in an area that’s sleepier and smaller, chances are its prices won’t have moved much when you need or want to sell in 10- or 15-years’ time.
As we have just tragically seen in Australia’s summer of bushfires, many regions that are popular with holidaymakers are also at increased risk of natural disasters.
Be it the cyclone-prone tropics, dense and dry bush of the south-eastern parts of the country, or the risk of flooding in coastal or low-lying areas, your ideal holiday town investment could be exposed to some pretty unforgiving elements.
And secondly, as we’re also seeing at the moment, it could be subjected to the whims of the economy.
When bushfires are raging nearby, and the sky is choked with thick smoke, people aren’t inclined to hit the road and take a holiday. We saw that in summer, with tourism seriously impacted across the country.
Now we’re grappling with the coronavirus and the uncertainty that brings, with impacts on the national and global economy.
Whether your investment is coastal or country, it too can be
If you’re financially well off, then by all means, treat yourself and your family to a holiday home somewhere lovely.
But if you’re still working on achieving your goals and dreams, then putting money into an investment that has all the potential of a money pit set to give you endless headaches and never make a profit mightn’t be the wisest choice.
Instead, focus that time, capital and energy on adding an asset with the best possible growth prospects to your property portfolio.
Then, when you’re in a great position to do so down the track as a result, buy that holiday home. Or better yet – rent it.
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