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Holiday properties are rarely a “holiday” for growth investors

Often as a Hudson Advisor I hear from members who are considering investing into a property that is predominantly holiday letting focused. 

Often these members are enamoured by actually staying at a “lovely apartment” by the beach / mountain / lake etc and when “relaxed and comfortable” on their well earned holiday their thoughts turn to the investment options of such a “wonderful place” 

Thankfully they actually call and ask the question of Hudson:  

“What do you think of me buying a unit on the Gold Coast / Mornington Pensinsula / Port Augusta / Margaret River / Thredbo / Port Douglas etc to add to my growth portfolio that I will let out to holiday makers at very large weekly rents ?

The simply answer is:  “enjoy the holiday but don’t spoil it with buying a low (net) yielding low growth commercial property investment in a highly volatile market”

The more complex answer revolves around why these properties are not what they seem and why they are not suitable for growth investors as follows:

1) RENT and COSTS    The price you pay as a holiday is not the return you will get as an investor.  Out of you high weekly rent the manger takes his cut, the cleaners take theirs, the advertising is deducted and other marketing costs.  I have often seen costs mounting up to well over 40% of the gross rent for such short stay properties.  Also by there very nature such property has peak and low seasons and the high rent you pay for a beach side shack in Jan can drop to a fraction of this in non school holiday July in the depths of winter.  So the variable income is a big concern to investors who require regular income to keep a leveraged investment on track 

2) LEVERAGE   Banks quite often frown on such holiday property and will either not lend against it at all or will greatly reduce the borrowing levels often down to 70% and below the purchase price    

3) MAINTENANCE   Having holiday makers in and out of a property constantly through out the year leads to a lot of wear and tear on the property itself as well as the furnishings   These furniture packages are expense and can run form 20K to 30K + depending on standard required and need updating regularly   Yes they are highly depreciable items for tax purposes but they are also high depreciable items for practical purposes and need to be update regularly 

4) VALUATION   The property market treats the holiday property sector for what it is: a commercial property that instead of being let to businesses on long term leases is let to holiday makers every week.  Hence the property is priced like all commercial property, on a yield basis.  If the rent achieved declines due to it’s age or competition from newer better appointed units then the value will reflect this.  More often than not prices will stay fairly steady but will not rise over many years unless income rises 

Overall a holiday property offers a relatively low NET yield, low capital growth potential, variable cash flow and high maintenance costs.  They are not recommended for growth seeking investors.

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