It sounds wonderful, doesn’t it? Owning real estate in a prime capital-growth location, gaining maximum rental returns on a nightly basis and getting free holiday accommodation for the family as well?
That is the dream that has been drawing property investors into the holiday letting real estate market for decades. Some would say it sounds too good to be true… but some swear it’s totally possible to have it all. The trick is to enter the market armed with all the information to ensure the recipe is right from purchase to profit.
Holiday Home Income
As with any investment property, the first thing to do is decide the buying budget and then calculate the necessary rental returns in order to ensure it’s affordable. It is true that holiday let investment properties almost always have higher weekly rents than permanent rentals and peak season rates can be 300% higher than the same property would if let on a permanent basis. However, it is also important to realise these rates are seasonal and estimated annual returns must account for significant variation throughout the year. A beach property for example, may rent for $1500 per week in summer, $1000 per week in other holiday periods and just $500 per week in winter.
Occupancy rates also need to be factored into estimated returns. While short-term rental occupancy rates may be as high as 90% in metropolitan areas, they are commonly 20-40% in regional areas. Talking to local holiday letting agents is the only way to get an accurate picture of area-specific occupancy rates. Particular types of properties may be more highly sought in some locales also, so quiz local letting agents on occupancy according to specific property styles and buy accordingly.
Most importantly, factor personal use into the investment return calculations. To ensure maximum revenue, avoid using the property during peak season or if personal use is one of the key reasons for purchasing the property, make sure personal time is deducted from the availability calendar prior to calculating revenue.
Vacation Investment Outgoings
Local letting agents can also provide an idea of regular holiday letting expenses. While it’s true that rental rates are higher, running costs are also more expensive than a permanent rental. Regular cleaning costs, marketing fees, linen hire and furnishing maintenance may all need to be added to management fees and standard holding costs and they can amount to more than 50% of quoted weekly rental rates.
Of course, the flip side of the higher outgoings is more tax write-offs. Because holiday homes are often let fully-furnished, right down to the crockery and the tennis racquets, there are a host of added depreciation benefits for investors keen to negative gear their holiday let property. Keeping holiday home furniture in top condition with a high replacement rate is a strong return-customer draw card and may also be in the best interests of the holiday home investor.
To sum up quickly, it is recommended the following basic figures have been estimated on an area-specific basis before beginning the holiday home property shopping:
- Weekly/nightly rental rates
- Seasonal rate variation
- Seasonal occupancy rates
- Management fees
- Maintenance and cleaning costs
- Cost of furnishing property and related depreciation
- Standard council rates/body corporate fees
- Lending costs based on budgeted purchase price
- Extent of associated taxable claims and depreciable items.
Then it is time to consider the capital gains and marketing of a holiday-let as an investment property.