Buying a holiday house: is it a smart idea?

Tossing up if you should buy a holiday home and if this will make a good investment?

If you've ever holidayed somewhere and fallen in love with the location and lifestyle you may well have been tempted to buy a property in the area.  It could be a charming beach shack, mountain cottage or unit with prime views of the Gold Coast’s beaches that has caught your eye.

holiday house for sale

But is this just a romantic notion - is there a way to buy a property where you love to holiday and make it work as a viable investment? Not all holidays destinations have that crucial factor - demand that exceeds supply - which is essential for long term capital growth of your investment.

There are also day-to-day practicalities to bear in mind - like who is going to take care of advertising, bookings, tenants and maintaining the property.  

Like any investment, it’s critical you look at the pros and cons of buying a holiday home to see if it makes financial sense for your personal circumstances. Let’s start by looking at the pros and cons of holidays homes as investments.

Read more: 8 French castles that are still cheaper than an average Sydney home

Pros & cons of buying a holiday house

The great thing about having your own holiday house is that you:

  • Have complete flexibility to go there when it suits you. So if you want to jump in the car and head there for a long weekend or your entire Chrissie break it is totally up to you.

  • Can rent it out to family and friends, who can visit with you, or at a different time that suits them. It is of course up to you if you charge them for the privilege.

  • Could generate income from renting it out as a holiday letting. And while a holiday rental is never going to match a conventional investment property for earnings, it can help to offset some costs of holding the property. In some popular locations you could actually charge rental rates that far exceed your mortgage.

  • Have the option to retire in it, particularly if you have purchased a holiday home in a location that ticks all your boxes.

  • May benefit from tax deductions that apply to holiday homes

  • Could see the property appreciate in value over the long term, especially if it's in a high demand area or close to major centres.

Like any investment there are also inevitable downsides, or cons, of owning a holiday home. These can include the following:

  • Due to the seasonal nature of holiday destinations, your property may not be tenanted as often as you would like or need to make it financially viable.

  • Once you've factored in all the associated, ongoing costs of holding the property, it may not be worth keeping your holiday house for the long term.

  • The local economies of many holiday destinations are often dependent on tourism, and are therefore more sensitive to any downturns which could impact your ability to find tenants.

  • The need, and cost, of finding someone to manage the property for you - to take care of advertising, holiday lettings and maintenance.

  • You may get bored of going to the same destination year in year out - and feel constrained by having to use your holiday house.

  • Like any investment property, you run the risk of your holiday house declining in value, or not appreciating enough to offset the holding costs.

You also need to consider the tax and financial implications of buying a holiday house.

Tax & financial implications of buying a holiday house

holiday home investment

The bottom line from the ATO is that, '...you can only only claim deductions for periods when the holiday home is rented out or is genuinely available for rent'.

That means you need to record when your property is rented to make an honest claim in your tax return. You cannot claim deductions for the proportion of expenses that relate to any private use. In the eyes of the ATO, private purposes includes, '...use by you, your family, your relatives and your friends free of charge'.

"You cannot claim deductions for the proportion of expenses that relate to any private use."

And if you're wondering what tax deductible expenses are claimable on a holiday property, these include:

  • Interest on the loan for your holiday property

  • Insurance on your holiday house

  • The commission your letting agent or real estate agent charges

  • Ongoing costs like council rates, maintenance and repairs

  • The depreciation of your assets

  • Capital works or construction costs

  • Travel expenses when you visit the property so long as the visit was strictly for inspecting, maintaining and making repairs to the property; not for leisure.

Another tax issue to consider is capital gains tax (CGT). A holiday home is not your primary residence, so it may be subject to CGT when it comes time to sell.

What else do you need to consider when buying a holiday home?

Things to consider when buying a holiday home

You need a good idea of what all the associated costs are of holding a holiday home. If you've taken out a mortgage for the purchase of the property, the bulk of your expense will be repayments on this.

Other costs to consider in your budget planning include:

  • Advertising and marketing your holiday home, on platforms like A‌i‌r‌b‌n‌b‌, Stayz or via a local holiday letting agent or property manager

  • Tenant management - typically with a local real estate agent, holiday letting agent or property manager

  • Monthly rates, including council, water and electricity

  • Ongoing repairs as wear and tear takes its toll

  • Maintenance to the property, including lawn mowing and cleaning

  • Insurance premiums

Read more: Hidden costs of buying a house

Tips for buying a holiday home

should i buy a holiday house

You should carefully consider if buying a holiday house is right for your individual circumstances, and evaluate it as you would any other property investment.

Start by researching location. Will you be able to find tenants for the periods when you are not using the property? Ideally demand for property in the location should outstrip supply. This may not be slap bang in a holiday destination, but somewhere close enough to be able to access it and with a more viable and stable local economy.

If you are planning on retiring to this property then consider if the local area has all the amenities you will need at that age - including shops, healthcare facilities and a local community.

Any holiday home should also have all the features that you need, such as number of rooms, and if the kitchens and bathrooms are up to scratch. Will you need to undertake any renovations to make it liveable? This could be an additional cost to budget for.

In terms of pricing your holidays rental, you may be able to charge different rental rates depending on the season. For example, summer school holidays are a prime time for families to go away, so you can charge significantly more - and make up for periods when there are no bookings.

It is also worth speaking with local real estate agents - who have intimate knowledge of demand for holiday lettings throughout the year. This can help you better understand the demand fluctuations for your holiday property and seasonality.

What to do with your holiday home when you’re not using it

If you want to maximise the return on your holiday home, then you are likely to want to have it tenanted for the periods you are not using it. Some popular options include using online platforms like Airbnb and Stayz, but remember that this is a self-managed option and you will have to deal with tenants, bookings and much more.

"Some popular options including using online platforms like Airbnb and Stayz"

Property managers, holiday letting agents and real estate agents are a better option if you are time poor and/or do not live close to the property. They do charge a fee - so research these before you sign up.

Investing in a holiday home is a serious financial commitment, so make sure you understand the local property market and costs involved before you make a purchase. You also need to do your due diligence and research locations that will give you a healthy rental yield and long term growth potential.

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