Buying a holiday house, August 2004

BUYING A HOLIDAY HOUSE – August 2004

Haven’t we all dreamed about it? Our own patch of paradise near the beach or perhaps tucked away in a secluded mountain village. The dream of owning a holiday house seems like the perfect antidote to stressful city living, but is it all it’s cracked up to be?
With coastal and regional property prices skyrocketing during the property boom of the last three years, it is not cheap to purchase that patch of paradise – and nor is it cheap to maintain it.
Council rates, new land tax rules which apply to all second properties and keeping the property in good repair are all ongoing costs on top of the initial purchase price.
But if that dream is still nagging at you, read Domain’s guide to buying a holiday house.

WORK OUT THE BANK BALANCE

Buying a holiday property means coughing up the initial purchase price, as well as stamp duty, conveyancing costs and building and pest inspections.
As Residex chief executive John Edwards points out, buying a second property is for people who have access to capital and cash flow.
“It doesn’t really make a lot of sense for people who are over-committed to a mortgage to go and get another mortgage to buy a holiday house,” he says.
Macquarie Bank’s head of property research Rod Cornish says there is only one reason to buy a second property in a holiday location, “and that’s lifestyle – the investment should be considered separately”.

THE PERFECT PROPERTY

There are all kinds of holiday properties available - low maintenance apartments, basic beach cottages, premium architect-designed retreats and secluded acreages in the bush.
Every person will have their own idea of what suits their holiday needs, but Cornish says the key location will always be the coast and areas within two hours drive of a capital city.
“During the boom, the price gains seemed to stretch to areas within three hours drive of Sydney but I would say anything further than that will be too far to go for a weekend,” he says.
He says rural villages are becoming more popular because of their affordability compared to beach areas.
“Increasingly, coastal is not enough – there has to be a village atmosphere and something that offers lifestyle facilities like restaurants or vineyards,” he says.

RENTAL STRATEGY

Most people who buy a holiday house use it sporadically and try to rent it out at other times to defray the costs of ownership.
There are two options for renting out a holiday house – but both have their pitfalls.
The first option is to lease the property for permanent rental, which provides the owner with a regular income stream but often at a low yield. It also means the property is permanently occupied and the owner can’t holiday in it.
The second option is to make the property available for holiday letting, which is volatile but can offer a high yield in peak seasons such as Christmas or Easter. The catch is that there is a high vacancy rate and sometimes steep management fees.
Ed Silk Real Estate operations manager Rebecca Silk, who oversees holiday rentals in exclusive Byron Bay where a house can let for $7000 a week during peak season, says owners need to expect to pay at least 30 per cent of the gross holiday rental income in fees.
“A lot of people who own holiday houses don’t think about all the expenses – they just think of the rents they can get in peak season,” she says.

INVESTMENT OUTLOOK

Cornish says coastal properties in NSW have been some of the best performing investments in the last five years.
“Some of those coastal properties have had massive price growth – in some cases over 200 per cent,” he says. “But you would have to say that sort of price growth is over for now.”
“As a typical rental investment, holiday houses don’t add up. The capital price gains can be strong but the rental gains are not.”
Holiday houses are not an ideal investment vehicle if rental return is what you are after.
What’s more the yearly expenses bill can be as high as several thousand dollars a year - especially if you add up land tax on all second properties on land worth more than $317,000, council rates, real estate agent management fees, insurance and ongoing maintenance and repairs.
Sometimes the ongoing expenses add up to more than the price of having a yearly holiday overseas.
Robert Hunt, the creator of holiday rentals website ozstays.com, says holiday house owners shouldn’t expect to make money out of their property.
“Holiday houses aren’t really a good investment but if you work your property and manage it well, you can get a return that covers your costs,” he says.

GET HELP FROM THE TAX MAN

CPA senior tax counsel Paul Drum, who is also a fellow of the Certified Practicing Accountants, says it is perfectly legitimate for holiday house owners to negatively gear the expenses of owning the holiday property against the income earned.
The catch is that you cannot claim expenses for the time you use the property for your own private holidaying.
“Traditionally, people who buy holiday houses like to spend one month of the year holidaying in the house and rent it out for the rest of the year,” Drum explains.
“That means that eleven twelfths of the expenses are deductible, but you cannot claim the other twelfth as that is your own private expense.”

6. ADD VALUE WITH GOOD MANAGEMENT
John Finucane built his own holiday rental property on the north coast, but has decided to manage the rentals himself to make sure he covers his costs.
“We just found that leaving the property on the books of a real estate agent is not enough to make sure your place is rented,” he says.
“The real estate agents can charge high commissions – anything between 12 and 15 per cent – and they don’t really work your property as well as you do.”
Finucane says advertising the property on the internet means he gets good forward bookings and he offers discounts to regular renters.

CASE STUDY
Megan and Giles Morton began what they call their “social experiment” in 2001 when they bought a rambling country cottage at Burrawang in the Southern Highlands and an apartment in Elizabeth Bay.
“The idea was that we would spend a three-day weekend in the country and use the apartment as our city base,” explains Megan. “I just wanted my kids to be able to run around in the kind of space I had when I was young but I needed access to the city for work.”
The couple are self-employed and have two young children, five-year-old Millie and three-year-old Sebastian.
“The whole two house thing really only works if you can get to it every weekend. If you only use it once a month, then it’s a bit of a waste of money,” Megan says.
The Mortons say the biggest pitfall of owning two properties is the expenses – there are two lots of electricity bills, two lots of insurance, two lots of rates notices.
“You have to be a Virgo and be passionately organised to make sure you don’t forget things,” she says. “You need two lots of food in each house, two lots of nappies, two lots of baby wipes – it can be hard to keep track.”
Now that the children are older, the Mortons have moved into a larger city house and there is less time to get to Burrawang.
“We get there at least once a month, maybe more often,” she says.
That means the couple need to rent the Burrawang house for short-term weekend or holiday rentals to make it worth holding on to.
“We’ve done three or four years of the social experiment and we knew we couldn’t afford to keep doing it forever,” she says.
They rent their house for $430 for a weekend, and manage and promote the property themselves.
“It is a huge investment in my time, but I figure if it means I can keep my dream home and I get to share it with other people who appreciate it, then it’s worth it,” she says.


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BUYING A HOLIDAY HOUSE – August 2004 Haven’t we all dreamed about it? Our own patch of paradise near the beach or perhaps tucked away in a secluded mountain village. The dream of owning a holiday house seems like the perfect antidote to stressful city living, but is it all it’s cracked up to be? With coastal and regional property prices skyrocketing during the property boom of the last three years, it is not cheap to purchase that patch of paradise – and nor is it cheap to maintain it. Council rates, new land tax rules which apply to all second properties and keeping the property in good repair are all ongoing costs on top of the initial purchase price. But if that dream is still nagging at you, read Domain’s guide to buying a holiday house. WORK OUT THE BANK BALANCE Buying a holiday property means coughing up the initial purchase price, as well as stamp duty, conveyancing costs and building and pest inspections. As Residex chief executive John Edwards points out, buying a second property is for people who have access to capital and cash flow. “It doesn’t really make a lot of sense for people who are over-committed to a mortgage to go and get another mortgage to buy a holiday house,” he says. Macquarie Bank’s head of property research Rod Cornish says there is only one reason to buy a second property in a holiday location, “and that’s lifestyle – the investment should be considered separately”. THE PERFECT PROPERTY There are all kinds of holiday properties available - low maintenance apartments, basic beach cottages, premium architect-designed retreats and secluded acreages in the bush. Every person will have their own idea of what suits their holiday needs, but Cornish says the key location will always be the coast and areas within two hours drive of a capital city. “During the boom, the price gains seemed to stretch to areas within three hours drive of Sydney but I would say anything further than that will be too far to go for a weekend,” he says. He says rural villages are becoming more popular because of their affordability compared to beach areas. “Increasingly, coastal is not enough – there has to be a village atmosphere and something that offers lifestyle facilities like restaurants or vineyards,” he says. RENTAL STRATEGY Most people who buy a holiday house use it sporadically and try to rent it out at other times to defray the costs of ownership. There are two options for renting out a holiday house – but both have their pitfalls. The first option is to lease the property for permanent rental, which provides the owner with a regular income stream but often at a low yield. It also means the property is permanently occupied and the owner can’t holiday in it. The second option is to make the property available for holiday letting, which is volatile but can offer a high yield in peak seasons such as Christmas or Easter. The catch is that there is a high vacancy rate and sometimes steep management fees. Ed Silk Real Estate operations manager Rebecca Silk, who oversees holiday rentals in exclusive Byron Bay where a house can let for $7000 a week during peak season, says owners need to expect to pay at least 30 per cent of the gross holiday rental income in fees. “A lot of people who own holiday houses don’t think about all the expenses – they just think of the rents they can get in peak season,” she says. INVESTMENT OUTLOOK Cornish says coastal properties in NSW have been some of the best performing investments in the last five years. “Some of those coastal properties have had massive price growth – in some cases over 200 per cent,” he says. “But you would have to say that sort of price growth is over for now.” “As a typical rental investment, holiday houses don’t add up. The capital price gains can be strong but the rental gains are not.” Holiday houses are not an ideal investment vehicle if rental return is what you are after. What’s more the yearly expenses bill can be as high as several thousand dollars a year - especially if you add up land tax on all second properties on land worth more than $317,000, council rates, real estate agent management fees, insurance and ongoing maintenance and repairs. Sometimes the ongoing expenses add up to more than the price of having a yearly holiday overseas. Robert Hunt, the creator of holiday rentals website ozstays.com, says holiday house owners shouldn’t expect to make money out of their property. “Holiday houses aren’t really a good investment but if you work your property and manage it well, you can get a return that covers your costs,” he says. GET HELP FROM THE TAX MAN CPA senior tax counsel Paul Drum, who is also a fellow of the Certified Practicing Accountants, says it is perfectly legitimate for holiday house owners to negatively gear the expenses of owning the holiday property against the income earned. The catch is that you cannot claim expenses for the time you use the property for your own private holidaying. “Traditionally, people who buy holiday houses like to spend one month of the year holidaying in the house and rent it out for the rest of the year,” Drum explains. “That means that eleven twelfths of the expenses are deductible, but you cannot claim the other twelfth as that is your own private expense.” 6. ADD VALUE WITH GOOD MANAGEMENT John Finucane built his own holiday rental property on the north coast, but has decided to manage the rentals himself to make sure he covers his costs. “We just found that leaving the property on the books of a real estate agent is not enough to make sure your place is rented,” he says. “The real estate agents can charge high commissions – anything between 12 and 15 per cent – and they don’t really work your property as well as you do.” Finucane says advertising the property on the internet means he gets good forward bookings and he offers discounts to regular renters. CASE STUDY Megan and Giles Morton began what they call their “social experiment” in 2001 when they bought a rambling country cottage at Burrawang in the Southern Highlands and an apartment in Elizabeth Bay. “The idea was that we would spend a three-day weekend in the country and use the apartment as our city base,” explains Megan. “I just wanted my kids to be able to run around in the kind of space I had when I was young but I needed access to the city for work.” The couple are self-employed and have two young children, five-year-old Millie and three-year-old Sebastian. “The whole two house thing really only works if you can get to it every weekend. If you only use it once a month, then it’s a bit of a waste of money,” Megan says. The Mortons say the biggest pitfall of owning two properties is the expenses – there are two lots of electricity bills, two lots of insurance, two lots of rates notices. “You have to be a Virgo and be passionately organised to make sure you don’t forget things,” she says. “You need two lots of food in each house, two lots of nappies, two lots of baby wipes – it can be hard to keep track.” Now that the children are older, the Mortons have moved into a larger city house and there is less time to get to Burrawang. “We get there at least once a month, maybe more often,” she says. That means the couple need to rent the Burrawang house for short-term weekend or holiday rentals to make it worth holding on to. “We’ve done three or four years of the social experiment and we knew we couldn’t afford to keep doing it forever,” she says. They rent their house for $430 for a weekend, and manage and promote the property themselves. “It is a huge investment in my time, but I figure if it means I can keep my dream home and I get to share it with other people who appreciate it, then it’s worth it,” she says.