Life's a beach

The phrases ‘holiday house’ and ‘successful investment’ are often mutually exclusive, but that doesn’t stop hundreds of investors taking the plunge into holiday destinations.

And as Wakelin Property Advisory director Monique Wakelin explains, there is a very simple explanation for irrational investment decisions when it comes to holiday homes: emotions.

“One of the things that investors do is that they go away somewhere for a weekend and have a great time,” she said.

“After a few nice coffees and a glass of wine they will amble down the main street and inevitably they are going to come across a real estate agency window. What they do is almost textbook: they stop in front of the window and think ‘this is such a fabulous spot, wouldn’t it be great to have a little bolt hole here – we can come whenever we want and we will make money out of it as well’.

“This is one of the biggest mistakes that investors make, because they act from a place of irrational emotion rather than a rational business framework. Most of the time that is a recipe for disaster.”

Due to the cyclical nature of holiday destinations, these markets are invariably highly volatile, making them prone to spectacular booms and busts, Wakelin continued.

“Investing and making money is all about consistency of performance – anything other than that equates to speculation,” she added.

“These locations are more volatile because they are very much dependent on cash flow and disposable income to survive. They are not acknowledged investment locations, and the lack of consistent rental demand drives the volatility and makes them speculative.

“Effectively, the only way to get this reasonably right is to have a crystal ball and know when these markets are in the depths of despair and then be able to predict when they are going to be at the peak of their cycle. You get in at the depths of despair and you get out when it is at the peak of the price cycle.”

In summary, you have to have a keen sense of timing to be able to do it properly and the large amount of money to get in and out of the market will eat into your profit significantly.

“I like to advise investors to let go of that mentality and not even try it, but if you are hell bent on trying it there are certain things you have to look out for,” Wakelin cautioned.

“You have to be prepared to weather the ups and downs. In the cyclical nature of these markets there will be ups and downs that you will not experience in the prime residential urban areas of the capital cities that come hand in hand with consistent underlying demand and therefore consistent performance.

“You have got to find a property within two hours drive of the nearest capital city and you have to try and pick an area where a multitude of sports can be undertaken year round – you have to be able to combine a number of different things so that the area you are buying into has year round attractiveness to both permanent residents, long term tenants, short term tenants and buyers.”

Activities like surfing, fishing, sailing, hiking, boating or skiing (in different seasons) will maximise the attractiveness for potential tenants.

“If you are buying down near the beach, for example, you want to buy somewhere where there is strong surfing interest year round, that you can go fishing year round, could probably do good hiking year round and that probably has a low fire danger,” she said.

“You are having to consider many more factors than you would if you were investing in the inner suburban area of your capital city.”

Looking at the wider area around the potential investment, investors should look out for attractions which are not dependent on the ‘resort’-type facilities in peak months.

“For example, wineries and bushwalking allow for year round visits,” Wakelin explained.

“You also have to try and pick an area which is underpinned by more than one industry – for example you don’t want to go somewhere solely underpinned by the tourism industry, or mining. There has to be more than one thing that the micro-economy relies on to produce revenue.”

Within a particular destination, care should be taken to position the property within walking distance of the nearest village but not too close to where teenagers and young adults congregate during the holidays.

“For example, don’t go buying a property behind the local pub or disco – you are in for a very rough ride with those,” Wakelin warned.

Investors should look out for medium sized two or three-bedroom houses and should avoid alternative schemes or accommodation styles such as timeshare, holiday units, serviced apartments or hotels, she continued.

And what are the downsides to owning holiday homes in your rental portfolio?

“A lot of people consider holiday homes a luxury purchase, which makes those houses very reactive to market downturns,” Wakelin said.

“When the market falters they are first on the list of expendable items, so they are very reactive. Even at their very best, holiday destinations tend to be very seasonal and the rental demand only arrives at the peak of the season – which is of course when you would like to use the property yourself.

“High vacancy rates go hand in hand with increased security risks, because it is dead easy to spot a vacant property by staking it out for a week.

“There are also significant maintenance costs, and that can be very high price to pay just to get away from it all – even for something very modest. Saltwater in the air takes a tremendous toll on the structural integrity of the house – the wood work, the painting, the guttering.

“Then you have multiple tenancies, which increases the wear and tear because even the most careful tenants will never look after it the way you would – particularly when it is short term.”

Properties must also match the expectation of tenants for fully furnished accommodation with all household amenities included – bed linen, accessories and appliances for example.

“When something breaks, which will be quite often, you will need to replace it,” Wakelin predicted.

“There is also the issue of management fees, which can take up a sizeable chunk of your rental income because of the high turnover. Agents generally charge a modest fee for looking after a place in the suburbs, but there is a much higher workload managing a property in the holiday areas. Finding tenants, organising multiple leases, inspecting properties – it is much more hands on for the agents and they charge accordingly.”

So should you consign the idea of owning a holiday home to yet another pipe dream?

“The bottom line is that if you are hell bent on doing it, then do it, but there are better and easier ways to make money out of property,” Wakelin concluded.