Is buying a holiday home a good idea?

If you’re thinking about a lifestyle change and considering buying a holiday home, here are some important things you should consider before you make the purchase.

A holiday home can be a wonderful opportunity to get away from city life and enjoy a retreat in an area that you love. It can be a place to get away with family and friends for special occasions, and it can also be an investment opportunity, if you decide you want to make an income from renting it out to holiday-makers.

Buying a holiday home is a big decision, however, and before you commit to it, there are some things you need to consider. To shed some light on the topic, we spoke with Michelle May of Michelle May Buyers Agents, to find out whether now is a good time to purchase a holiday home, and find out some things that it is worth considering for prospective buyers.

Five things to consider when buying a holiday home, according to a buyers agent

If you’re seriously considering purchasing a holiday home, there are some important things to consider that could help make sure you find the right property for you, and avoid committing too much money to a house or apartment that ends up being unsuitable. When purchasing a holiday home, Ms May said it is important to:

1. Work out your budget
2. Understand the holiday home market
3. Get advice from an expert who knows the area
4. Think about how much time you’ll spend there
5. Be prepared for the risks of owning a holiday rental

1. Work out your budget

As with any big property purchase, it is important to be financially prepared when buying a holiday home. One important aspect of this is knowing your budget, and to this end, you might consider home loan pre-approval. This is a way for a lender to let you know in advance how much they might be willing to lend you, and can give an indication of the price range of properties you are likely to be able to afford.

Ms May told Canstar that regional property markets can be more volatile than those in metropolitan areas, so for this reason, it can pay to enlist professional help if you’re thinking about purchasing in one.

“You’ve got to make sure that you do the maths very conservatively, work with a great broker, so you know what you’re in for when rates go up,” she says. “A holiday home is typically for people who are already established and own their own homes, it’s a luxury item. I think that, as long as you’ve done the numbers, if you have finance and you can afford the interest rate increases, then now is a really good time for buyers, because a lot of competition has left the market, both in the owner-occupier space in the cities and in the holiday space.”

2. Understand the holiday home market

The past few years have seen significant upheaval in the Australian property market, with factors such as record low home loan interest rates throughout much of 2021 sending property prices soaring. Likewise, the pandemic saw large numbers of people leaving cities like Sydney and Melbourne behind for homes in regional areas, which drove up prices due to increased demand.

Prices have risen in places like Victoria’s Mornington Peninsula, Queensland’s Gold Coast and the NSW northern rivers – all potentially popular as holiday home destinations.In more recent times, though, rising rates have cooled the property market in major cities, and this has also had an effect on the holiday home market.

Ms May says that, as a result, there are some “real opportunities to pick up some really good properties” in holiday areas right now, not least of all because, with rates rising, many who currently own in those areas may be questioning whether they can afford to hold on to holiday homes.

“There are some who’ve been affected by the current market, and if that’s not the case for you, then it may be a good time to go ahead,” she says.

3. Get advice from an expert who knows the area

Chances are, if you’re buying a holiday home, it will be in an area that is some distance away from where you normally live. You may know the area well if you visit frequently, and you may have connections in the local community, but if you are unfamiliar with the area, then a professional such as a buyer’s agent could potentially assist you.

“If you are buying in an unfamiliar area, you can’t just rely on the selling agent’s advice,” cautions Ms May. “You really need to have someone with local, insider knowledge who knows the agent, knows how that market works, and is going to protect you from overpaying for a dud of a property that’s going to cause you headaches and take away from your relaxation.”

May adds that, if you are planning on using a buyer’s agent, then it can be worth using someone who is local to the area, rather than a “fly-in fly-out” agent based somewhere else, who may not have the same degree of expertise, including knowledge of local agents and the market in the area more generally.

4. Think about how much time you’ll spend there

One key consideration when buying a holiday home is thinking about how much you’ll spend there – will it be a place that you visit only occasionally, or a regular weekend getaway, or even a “bolthole” for you to live in part-time while occasionally commuting to the city as part of a hybrid working arrangement?

If you only plan on visiting a holiday home occasionally, then May says it may be worthwhile to think about it from an investment perspective, as well as a getaway. She says that if you rent the property out a few months at a time, through a platform like AirBNB, then it’s not necessarily something that has to cost you money but an investment that can possibly generate a return.

On the other hand, you may be in the fortunate position where a hybrid working arrangement allows you to live part-time in your holiday home. In this case, you may consider purchasing something that’s within commuting distance of the city, where a longer commute may not seem so arduous if you only have to do it once or twice a week, or less than that.

Ms May says that this kind of arrangement could potentially allow you to enjoy the holiday lifestyle while still at work.

“COVID has realigned people’s perspective on what’s important in life, and if a holiday home outside the city is where you get your peace of mind and your relaxation and you can afford it, then why not look into purchasing one?” she says.

Of course, a holiday home can be more than a getaway – you may even be thinking about buying a property now with a view to eventually making it your main home in retirement, and either selling your existing dwelling or turning it into an investment.

Whatever your budget and whatever the reason for your purchase, a holiday home is a major investment, so you may consider consulting a financial advisor if you’re planning to purchase one, to help you organise your finances in a suitable manner. There could be important financial implications to consider, such as tax arrangements.

Explore: 20 tax tips for property investors

5. Be prepared for the risks of owning a holiday rental

If you purchase a holiday home and you only plan to be there for parts of the year, then one way to get some return on your investment is to rent the property out to holiday-makers, whether privately, through a short-stay service like AirBNB. The rental income that comes with this may help you pay off the mortgage, but you will need to be prepared for the realities of owning a holiday rental property.

Michelle May warns that renting a holiday home out can come with risks, just as with any other investment property.

“If you’ve got to rent it out to make it financially worthwhile, you may need to have a rental manager,” she says, adding that you will also need to consider such things as the cost of maintenance on the property, and the risks you face, such as damage to the home if you get tenants in who like to party a bit too hard.

It is a wise idea to investigate what types of insurance you will need to cover any damage to your property, by tenants as well as other events such as storms. In some areas, you may need to consider a higher level of insurance to counter risks due to climate change, such as flooding from rivers or the sea, particularly in coastal areas, which can add to the expense of having a holiday home. If you are not going to rent the house, you may also need to declare this to your insurer, and this could also change the cost or nature of your policy.

Depending on the location of the property, it may only be popular at certain times of year, meaning you may struggle to find guests to stay outside of peak season, and if you are relying on rental income to help pay off your mortgage, this could be a financial burden. Likewise, it may also be the case that the times you actually want to use the property are the times when holiday rentals are the most in-demand in the area, meaning that you might either have to forego your trip or miss out on rental income.

There can be other financial risks, such as the extra income changing your tax arrangements, which need to be considered.

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