Posted on July 4, 2022
THINKING OF BUYING A HOLIDAY HOUSE AS AN INVESTMENT?
IS THIS REALLY A WISE CHOICE?
Everybody loves to go on holiday. I know myself that I love to explore new places every time we travel.
For many, having a place you know and love to return to every holiday can give peace of mind, especially when you have a family.
Popular retreats are getting more and more under demand, so securing a spot can be difficult. This often prompts families to consider buying a holiday house.
This is where you really have to weigh up the risks in taking a step in this direction.
Common sense plays are large role in your decision making.
One of the first things to consider is your current level of mortgage debt on your principle place of residence (PPR). If you have a sizable debt on your home, then it is probably not a good idea to get into further debt.
An investment in property is used to help you pay down mortgage debt on a PPR by structuring the investment cash flow from rental and tax incentives. If you are looking to use the holiday home during the peak holiday periods, then you will reduce the rental income substantially and there won’t be any tax incentives that you may claim.
The only time that an holiday home may work for you as an investment is when the holiday rentals exceeds the normal rental expected from a property in the area together with whatever tax incentives you may receive less the loss in rental income from when you use the property.
If you have a situation that the cash flow received after expenses and losses is still positive, then you can look to securing a holiday home as an investment.
Please note, however, that a holiday home that performs in this way is very rare and will most probably be in an exclusive area and unaffordable.
In reality, most holiday rentals barely break even. If they owe a large mortgage debt then they will run at a loss. So common sense will tell you that a holiday home as an investment is not feasible. I t purely becomes an expensive luxury item that will drain a lot of your cash flow.
If you have mortgage debt to pay on your PPR, then a holiday home does not make for a sound investment.
If you have no debt on your PPR and are able to pay cash for a holiday home, then of course, this becomes worth while.