You might have felt it on your last holiday. The peace and quiet, the sun and the waves (or swap for a good book looking over a winery or paddock if that is more your scene). Ah, the serenity…if only you could bottle this and own it. In fact, the real estate window is right next to the ice cream shop, let’s have a look, perhaps we can buy a piece of this?
However, owning the wrong holiday house could be the source of more pain than a sore tooth from a cold ice-cream. It can cause family arguments, cost you lost revenue, and keep you up at night – not what you want from a dream home at the beach or in the mountains or wine country.
- The property can pay for itself from rental income or at least offset much of the expense. The right property well chosen and well managed could outperform long term rental yields by as much as 50-80%.
- Somewhere to live in retirement, and a place adult kids can stay in emergencies.
- Store kayaks, boats and other unwanted clutter there instead of at home if not used in between.
- Capital Gains – especially for coastal markets within 2-3 hrs of capital cities can be above average.
- Negative Gearing Tax Benefits (true at the time of writing)
- If you don’t build the rental income it will cost money each year. Badly managers or being used by family can result in $10k-$30k per year negative cash flow.
- Extended vacancies in between peak periods or school holidays can mean low or no income months.
- Management fees, cleaning, council rates, and maintenance plus insurance are significant ongoing costs to factor in.
- The best properties are expensive for a reason
If you are Kanye or Warren Buffett then you can probably afford to go ahead and buy the best with pure emotion, then leave your waterfront mansion empty 90% of the time… but for the rest of us we need to balance out the dream with some reality.
Can normal people actually invest in a property and rent it short term as an investment?
Shock: Yes (IF some rules are followed!)
9 Rules for successful holiday renting:
1 – Do TAKE IT SERIOUSLY. Short term rentals are like long term investments but require a little more focus, similar to owning a small side business. If you want a purely passive investment this probably isn’t it.
2 – DON’T USE IT in the first few years (ideally 5-10). You need to treat it like a business and make a profit from the peak season. Don’t give in to your cousin who suddenly becomes best buddies and wants to stay the week of Christmas – and don’t take up all the peak periods yourself. The more you treat it like an investment in the early years the better the financial rewards and the more freedom you will have so you can choose to use it yourself later on.
3 – Do THINK LONG TERM for short term holiday letting. It takes around 3 years of great experiences (assuming you created an experience people to want to come back for) to get good repeat business momentum and enough 5-star reviews on Airbnb or Stays to get your occupancy rates high enough to really bring in good returns. Don’t despair when your first year doesn’t break any income records.
4 – Do CHOOSE LOCATION CAREFULLY. Whilst long term tenants can live anywhere there is a need, holidaymakers are fussy and will always choose a property closer to the beach, ideally walk to shops, or with a cracking view over the water if possible. They will turn their nose up at something further back, further out or blander. The exception to this is farm stays but the views, ambiance, and facilities must make up for distance if you are doing this kind of project.
5 – Do consider OLDER PROPERTIES. Australian tourists are happy with quirky and will tolerate older homes as long as they are clean, well decorated and fun! What is fun? Well, you can be a bit more vibrant with your cushions and paint colours, you can be more adventurous with how you lay out entertaining areas or furniture choices.
6 – Do REMEMBER THE LAND is still the most important factor. As will all property investments you are really buying land in a desirable area and betting that people will want to live in that area long term. The house brings the income but the land is where the growth is. As such, don’t forget that the block of land, its location, its development potential and other factors such as zoning, density rules, restrictions etc are still critical to the investment success long term. Larger blocks are our favourite!
7 – Do remember MORE BEDROOMS = MORE INCOME. Renovating for additional bedrooms and even developing a 2nd dwelling on the property can ramp up the income. Development can be highly profitable but most people feel its too risky. One small scale, low risk form of income development that can magnify your returns on a holiday home is to build a secondary dwelling or “Granny Flat” – as long as your site selection is done correctly, you may be able to build a small dwelling in the rear/side yard, and advertise it separately, or together with the main house for even greater returns.
8 – Do CONSIDER A SPECIFIC NICHE – specific people have needs (such as pet owners) and will pay a premium if you can accommodate them. Horse lovers, dog lovers and boating enthusiasts all take holidays and you can profit from their extra needs.
9 – Do SELL THE SIZZLE not the steak. First impressions count even more for holiday homes, Gardens, paint, furnishings and decor all complete the holiday experience so while they don’t have to be expensive, at least put some thought it so your guests have a great time. A bottle of wine or chocolates plus a spare role of loo paper goes a long way towards a 5 star review which will improve your success over time.
As you can see, combining clever buying selection, plus renovations/development plus short term rentals can generate above average returns for savvy buyers but you do need some discipline to make it work.