By Victor Kumar
Summer is here and most of us are hanging out for the holidays.
Many of us will head away to tourism meccas around the country, where we’ll temporarily put down roots for a week or two.
The problem is our sunny depositions at that time of year might result in making poor investment decisions – like buying a holiday home.
Cash flow concerns
One of the biggest issues with holiday-let properties is that they drain your cash flow faster than the holiday period comes and goes.
What I mean is that if you look at most purchases, the cash flow is “dressed up” to look as good as possible.
That’s because people usually list holiday homes on the market at the optimal time of the year so that it appears better on paper.
For example, they decide to sell during summer because they’ve had a couple of months of strong rental income, which they use to highlight its worthiness as an investment.
In reality, you should consider the past five years of income and expenses to properly assess its finances.
Of course, most holidaymakers are enjoying themselves and probably don’t want to think about going back to reality, so they start dreaming about owning a holiday home in that location.
They reason that, because they themselves love that area, so will plenty of other people.
However, they fail to understand that it’s usually only popular for a few months and that will probably result in major cash flow problems throughout the year.
The agent might tell them it’s going to be occupied for 70 per cent of the year, but that is only a little more than eight months, which would be an inconceivable percentage for savvy investors.
Not only is it likely to be empty for four months of the year (at least), the ownership costs are much higher than a normal residential investment including management fees as well as maintenance and cleaning costs.
As holiday homes are furnished, owners also have to regularly replace furniture and furnishings, even down to missing glasses and cutlery.
Ditto, with cleaning costs, which has to be completed after every booking, including spas.
When the economy is booming, people are more likely to take holidays, but it would be very unusual to ever have an occupancy rate of higher than 70 or 80 per cent in my opinion.
Conversely, when the economy is not great, not only will your cash flow fall off a financial cliff, but you probably won’t be able to sell the property either.
You’ll be left with a property that is costing a fortune to hold and you won’t be able to offload it.
Clearly that has the potential for significant financial issues.
Holiday-let properties are also one of the most illiquid assets around because of the reduced number of buyers interested in purchasing one of them.
Even a studio apartment in the city is more liquid than a holiday home.
Also, from a lending perspective, there are a limited number of banks that will even give you finance to buy one, plus you’ll need to come up with a 30 to 40 per cent deposit.
Do as I say not as I once did
The thing is I know this not only theoretically but practically, too, because I fell into the same trap a long time ago.
My wife and I have two holiday let apartments on the central coast of New South Wales, which have gone backwards in price in the past 10 years.
Not only are we limited to only staying in one of them outside of the major holiday periods, in the winter months the income is practically nil when there is a $600,000 mortgage to service.
During summer, we might get $6,000 to $8,000 a month in rent, but the income is not consistent, so my mid-year cash flow is horrible because there is no money coming in.
Not only are the values lower than what we originally paid, the strata fees have skyrocketed to $12,000 a year.
Like so many people, we thought that we’d stay there all the time and our friends and family would go there every second weekend as well.
The truth of the matter is that in the past five years, we’ve been there a paltry three times.
There is no doubt that holiday homes are emotional purchases, but the allure wears off very quickly.
Once the rose-tinted glasses have been removed, most people are left with a property that is costing them thousands of dollars to hold every year as well as a holding that they often end up selling for a loss.