Is buying a holiday home a good investment?
Thinking of buying a holiday home as an investment property? Find out what conditions make holiday rentals a smart investment property choice.
Many Aussies dream of owning a holiday home, perhaps in a coastal town or cozy cabin away from the city. A second property in a serene location can give you the perfect home away from home. It also has the potential to generate rental income. But are those reasons enough to invest in a holiday home?
Ultimately, it depends on your financial situation and personal goals. Below is a useful guide to help you figure out if a holiday home is a good investment for you.
What do you want out of your holiday home?
Do you want a holiday home for personal use, rental income, or a mix of both? The costs associated with owning and managing the property will be influenced by how often you use it and its intended purpose.
If you aim to generate passive income, it may come at the expense of your own use of the holiday home. Government regulations, fees and seasons may all reduce the time you can use it yourself.
Meanwhile, buying a holiday home for you and your family to use throughout the year could mean you may not be able to generate enough passive income to earn a significant profit.
Holiday homes purely for private use
Buying a holiday home for your own use gives you the freedom to choose a location that’s most desirable for you. You don’t need to think about whether it’s a highly sought-after spot for holidaymakers or if it can offer great rental returns.
However, you need to consider how you’re going to maintain and manage another property. This is especially true if the property is out of state.
Even if you won’t be using it for rental income, a holiday home can still get you capital growth. The value of your property could increase over the years, based on its location and market factors.
Holiday homes as a rental property
Holiday homes usually generate income seasonally, depending on where they’re located. Beach houses, for example, see the most activity in the summer season and often have very low to zero renters during the winter months. If you’re looking for consistent passive income, you may need to buy a property in a region that is attractive to holiday goers all year round.
On the flip side, it’s also possible for those who want to use their holiday home primarily as a personal property and occasionally rent it out. Short-term accommodation platforms like Airbnb and Stayz also make it possible to generate cash flow from holiday homes without turning them into full-time rentals.
When setting your goals at the start of your investment journey, it’s important to be realistic about how much you can charge, and factor in whether you can afford to cover the repayments on your loan yourself, without income from rentals, as there is no guarantee you will be having guests all year round.
Tax rules for holiday homes
Tax implications change based on whether the property is used primarily as a rental or a personal residential property. Here are some of the tax implications and possible deductions for holiday homes according to the Australian Tax Office (ATO):
- Your holiday home isn’t rented out – You can’t claim your holiday home on your tax return. You can only include it in your tax return if you sell it, claiming a capital gain or loss.
- Your holiday home is rented out – You need to include the rental income from the holiday home in your tax return. Expenses for the property incurred for generating rental income could be claimed.
- Your holiday home is a part-year rental – For those using their holiday home as a rental and for personal use, you need to divide your expenses. You can only claim deductions for expenses related to generating rental income. You can’t claim your expenses during a period when it’s not genuinely available for rent or reserved by yourself, friends, or family.
Before turning your holiday home into an investment property, it’s best to be aware of all the tax rules surrounding properties that are and aren’t genuinely available for rent. Contact a tax professional to get a better grasp of the tax guidelines and know possible deductions.
What home loan should you use for a holiday home?
When buying an established property, you usually have two finance options: an owner-occupied home loan and an investment home loan. An owner-occupied home loan is used for those buying a residential property as their main personal residence. Meanwhile, an investment home loan is used for buying investment properties, such as rentals and other residential properties that are not considered a ‘primary place of residence’ or an ‘owner occupied’ home.
If you’re unsure about what type of loan you should get, it’s a good idea to speak with an expert. Reach out to us at loans.com.au to learn about your finance options. Our friendly lending specialists are more than happy to help you find the ideal loan for your holiday home purchase! Call 1300 840 211, or if you’re ready to get started, you can apply for a loan online.
Find out in under 2 minutes if you qualify for one of our home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
