http://finance.ninemsn.com.au/newsbusiness/8396547/how-to-decide-if-you-should-invest-in-a-holiday-house

The ultimate guide to the pros and cons of holiday home investing, by Margie Sheedy.

How many times have you gazed into the window of local real estate agent while on holidays? A break from the grind often lulls us into thinking that a beachside idyll just might be worth investing in.

However, experts urge us to think with our heads, not our hearts. To help, here’s the ultimate guide to the dos and don’ts of holiday home investing.

Dos

Do research the potential for capital growth. “Capital growth is generally strongest in towns with year-round tourist appeal and a well-established economic base,” says Justin Butterworth, Stayz Group business development manager.

Do research for future tourist growth. “People often miss looking at the potential growth of an area for tourism or other factors that will impact the value of the property,” says Matt Lahood, general manager of sales for McGrath Estate Agents. James Gerrard, financial advisor with PSK Financial Services , also recommends asking: “Is there the potential to rent it out regularly during non-peak periods to fruit pickers or mining sector employees?”

Do create a cash flow financial plan, says Lahood, “to see if you can service the loan or repayments.”

Do revisit the destination, often. Gerrard suggests you “spend a few holidays in the area you are thinking about to ensure that you will not get ‘bored’ of the location a few years down the track.”

Do think through the rental logistics. “Decide whether you want to manage the property or enlist the help of an agent,” suggests Butterworth. “Ensure the listing uses engaging photographs and copy that brings the property to life at a price point that is attractive to holiday seekers, regularly update the listing, and respond to enquiries and take payment in a timely manner.”

Do factor in a property’s repair and maintenance costs. Gerrard says they are likely to be higher on holiday homes “given the large number of different people using the property causing wear and tear. Further, given that the property will be fully furnished, there are more assets which will need to be replaced such as televisions and appliances.”

Do think about selling the property. “Always consider any land tax that may be payable on a second property,” says Lahood.

Don’ts

Don’t think of rental return alone. Research capital growth and treat it like a business,” says Matt Lahood of McGrath Estate Agents. Justin Butterworth of Stayz agrees: “a general rule of thumb for investors is that the gross rental yield of a property should be halved to account for related costs and get to the net rental yield for a property. Add this to the expected capital growth to get your expected total return on investment before tax.”

Don’t forget it’s an investment. Butterworth says that renting out a property to tourists in the peak holiday periods, rather than using it yourself, “will increase your total rent for the year, then your gross yield will rise. And due to the lower use of the property, maintenance costs are also likely to fall, improving your net rental yield as well.”

Don’t rely on your superannuation fund. Using your superannuation to purchase a holiday house breaches the ‘sole purpose test’, says James Gerrard of PSK Financial Services. “Your superannuation is meant to be used for the sole purpose of accumulating a retirement benefit so you are prohibited from enjoying the assets.”

Don’t underestimate the location. “Remember that a holiday house does not have legs and cannot walk to another location,” cautions Gerrard. “Some people are happy to return to the same place every year, but consider whether that is you or not.

Don’t forget the Tax Man. “When you buy a holiday home and rent it out for any period, you must declare the income in your tax return,” says Butterworth. “If you intend to use your property for part of the year and then operate it as an investment property for the rest of the time, you will need to convince the Tax Office that the property is a genuine investment. While you are able to claim deductions (including interest expenses) for any times that you have rented out the holiday home, these must be allocated according to the time it was rented out.” Contact your accountant or the ATO directly for more information.