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Ben Kingsley Blog post by Ben Kingsley

Holiday Homes as Investment Properties

Its holiday season and that time of the year we all head to the beach or the bush for our Christmas and New Year breaks. It’s a time we get to read the paper from front to back and also even pick up the local papers for a catch up on what’s happening in our favourite Christmas holiday destination. It’s also a time we get to wander up and down the local shopping strip and do a little window shopping and the one thing that’s constant in both of these pastimes is the promotion of Real Estate.

We can’t help looking at potential dream properties in dream locations and picturing ourselves enjoying the good life from this moment forward.
Once we spot the property we like, we then start to convince ourselves it’s a good idea.

  • The local population is growing so that should keep prices moving up
  • If we buy we can rent it out on the weekends that we don’t use it, so it won’t be too much of a financial drain on us
  • The real estate agent tells us it’s a great buy and we agree, even though we have little knowledge of recent sales and values
  • The complex we are buying in are offering rental guarantees or its going to be managed by a hotel group and run as a holiday letting arrangement as we get two weeks a year free accommodation in the so called ‘resort’
  • If we had something more permanent we would come here more often

Whatever way you decide to justify it to yourselves, please make sure you do not use ‘investment’ as your primary reasoning, because that facts are very clear, these type of investments are a poor cousin to ‘quality’ investment properties located in major cities.

 

Why Not?

Well, historically other than absolute beach/water front properties in these locations, the typical investment under-performs in capital growth and rental yields over the longer term (10-20 years). The main reason for this is that the income in these locations are lower than their city cousins and without a great majority of higher income earning people on a particular location, prices and rents don’t move up. Sure those bringing in high incomes from the cities do assist in price cyclical price increases over ‘fad’ times, but fail to deliver the critical mass needed to limit your risk.

Most of you would have heard me talk about the wealth difference created by different capital growth returns over time, but here’s a refresher. $400,000 property returning 10% p/a (quality location) versus $400,000 in secondary location returning 7%. Difference in asset wealth in 20 years is $1,143,126. That’s $1.1 million in additional wealth because you made wiser investment decision.

Assume you have taken the same investment loan out for each property, so the interest has cancelled itself out (I could have argued your rental income would be much higher on the city property as its value grows quicker, but just my capital value numbers make this a no-brainer).

Now ask yourself this question, how often are you going to really spend at your holiday location a year. Let say, you can get 26 weekends of the year and two full weeks. If you rented a place by the weekend it might cost $300 a night so let’s say you can stay 66 might a year—that’s $19,800. Over 20 years that’s $396,000.

So in conclusion your opportunity cost or lost wealth from buying holiday homes could be in the vicinity of $747,000. What if you bought the better investment property, that sort of wealth creation could allow you to afford to rent that beachfront house out every Christmas and still be in front.

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