Before You Invest in Holiday Homes

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Rental returns

Rental returns can and do fluctuate widely for holiday homes. In many coastal spots, the average holiday rental period is eight weeks a year with demand plummeting during winter.

Michael Troon, CEO of Lorne Real Estate, on Victoria’s Great Ocean Road where prices have doubled in the past five years, says investors who buy into places such as Lorne do so for capital growth rather than rental return.

Troon estimates that permanent rentals – where the property is leased all year round – account for less than 5 per cent of Lorne properties and typically provide a net annual yield of no more than 2 to 2.5 per cent. While holiday properties in the region typically command weekly rents of $2000 or more in peak periods, most lie vacant for the rest of the year and annual yields are similar to a permanent rental.

Demand is more consistent for holiday properties in warmer locations but only for prime properties. Karen Stephens, holiday letting agent at Raine and Horne at Terrigal on NSW’s Central Coast, says proximity to the beach and a sea view make all the difference when it comes to success with holiday letting. She says quality houses with these attributes can achieve an annual rental income of between $30,000 and $40,000 or even higher. However, for properties further back from the beach it’s a different story; their owners are often advised to consider a permanent tenant.

Tax implications

When you buy a holiday home and rent it out for any period, you must declare the income in your tax return. If you intend to use your property for part of the year and then operate it as an investment property for the rest of the time, you will need to convince the Tax Office that the property is a genuine investment. While you are able to claim deductions (including interest expenses) for any times that you have rented out the holiday home, these must be allocated according to the time it was rented out. Unless the holiday home is your main residence, you will most likely have to pay capital gains tax when you sell it or transfer it into someone else’s name.

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