Investing in a holiday home on the promise of high returns and occupancy rates is enticing, but there are risks for buyers who do not choose carefully.
The ease with which guests are connected to properties through online advertising and transacting, along with the economic pressures on holiday homeowners wanting to increase the use of their premises, has seen more holiday lets come on to the market.
But many homeowners letting their properties are caught up with myriad problems, from lower than expected rental rates and guest numbers; disputes with councils and neighbours; inescapable contracts with property managers and letting agents; to high maintenance costs.
“Do not confuse a holiday with an investment,” Real Estate industry (NSW) chief executive officer Tim McKibbin says. “We’re all potentially guilty of this when we go somewhere and have a wonderful time. You have to come at it from a non-emotional, calculating perspective.”
Before considering buying a property at your favourite holiday spot, investors should investigate visit statistics, occupancy rates and rental returns, he says. This can be done by consulting tourism boards and real estate agents.
The location and accessibility of a property are also crucial. Its proximity to an airport may affect consistency of booking numbers. There’s little point, for example, in buying a beautiful, secluded country cottage for investment if guests are not prepared to travel more than three hours.
Costs and returns
Returns for holiday lettings for units between $500,000 and $2 million are about 3.5 to 4.5 per cent net, while for high-end homes they’re about 3 per cent, Peter Butt, principal of Richardson & Wrench at holiday hot spot Noosa, says.
“About 45 per cent of the rent is spent on costs such as cleaning, booking fees, pool maintenance and insurance,” he says.
Investors are also often attracted to popular destinations such as Surfers Paradise, where president of the Unit Owners’ Association of Queensland Wayne Stevens says property managers and holiday letting agents are commonly used in apartment complexes.
Web of contracts
Many investors are not adequately aware of the web of contracts attached to premises they buy. Developers on the Gold Coast often sell 25-year contracts for the management rights to caretakers and letting agents who receive 12 per cent on all holiday bookings, detracting from investors’ earnings.
And the industry is rife with complaints of undisclosed commissions and excessive servicing costs, he says.
“Undisclosed commissions can soak up a good deal of a return, so owners need to make sure that charges don’t render that return down to zero,” Stevens says.
“If there is a dispute or dissatisfaction with a caretaker or letting agent, there’s is inadequate recourse available.”
General manager of business development at Body Corporate Services John Georgas says buyers also have to be wary of the lure of developers’ advertising for holiday rental properties.
Developers struggling to sell holiday homes often entice buyers with fixed returns for up to two years, which seem attractive until the expiry date comes around. “It is factored into the price of sale, which is slightly inflated,” he says. “It’s important to be mindful that rent is seasonal. Mortgage payments must be budgeted for the 12 months.”
There are also problems associated with switching property managers.
Before buying, it is also critical investors contact local government authorities to find out what rules apply to holiday letting, as councils are taking different approaches to managing short-term stays, particularly in residential areas.
In Sydney’s popular northern beaches areas such as Manly, a development consent is required, while in holiday hub Byron Bay in northern NSW, the council is, among others, trying to restrict holiday rentals because of the impact on long-term residents.
One Byron Bay resident, Simon Davis, says complaints about water, noise, parking, rubbish and anti-social behaviour are common and put owners at loggerheads with their neighbours. “Holiday letting is fine, but keep it in the CBD and out of the suburbs where people are trying to lead normal lives.”There are people who won’t buy here if there is a whole lot of tourism activities are going.
Cost of uncertainty
Byron Bay Holiday Letting president John Gudgeon says the uncertainty surrounding council’s proposals affect property values.
Owners also have to balance high-cost demands of guests who seek the luxury of fine furnishing, pay TV, modern kitchens, multiple bathrooms and games facilities.
“There are also advertising costs and bookings through rental portals, real estates and local tourist sites that have to be managed,” Gudgeon says.
Anton Stanish, general manager at holiday homes rental portal Stayz, says owners can engage professional property managers to manage bookings and organise cleaning and maintenance. “But if they have a book of 150 properties, what share of attention are you getting?”
Running a B&B
Holiday lets generate higher yields compared with permanent rentals and give owners the flexibility of having a holiday home while earning an extra income, he says.
But, all in all, it is “no different to running a bed and breakfast”.
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