Being in the position to own your own holiday home at any point of your life is an exciting prospect. All the hard work from years of dedication to have a “home away from home” is something that majority of individuals or families dream about. As appealing as the prospect is, it’s essential to evaluate numerous factors before diving into the holiday home market.
This article, in conjunction with our Considerations for buying a holiday home checklist, provides a step-by-step guide to help you on your decision-making process.
It’s important to remember in most situations purchasing a holiday home is not a financial investment; it is a lifestyle choice. Although long-term capital return may arise, it’s essential to recognise the inherent unpredictability of holiday markets. In times of economic decline, vacation homes frequently become the first class of real estate asset to be sold. Therefore, it’s crucial to approach the decision with realistic expectations, understanding that profitability isn’t always assured.
Before making the purchase, determine whether you need the holiday home to generate income when you’re not using it. Renting out the property can help cover expenses, but it comes with its own set of challenges. One significant consideration is the lack of control over the types of guests who stay. Varied levels of care from different renters could impact the property’s condition and reputation in the neighbourhood. Evaluating the potential for rental income against the associated risks will assist you in making an informed decision.
There are many financial decisions to consider when buying a holiday home. Evaluating your financial situation and determining whether you’ll require a loan to fund the purchase is essential. It’s important to remember that some banks may have lending restrictions on certain types of holiday accommodation. For example, short term holiday rentals may face challenges in securing funding vs long term rentals. Avant Law recommends seeking advice from financial professionals to explore your borrowing options and ensure you’re well prepared to navigate any lending limitations.
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Consider the size and configuration of the holiday home based on your needs and requirements. Ask yourself as a buyer; are you envisioning a cozy retreat for two or are you anticipating for family to be able to visit. This will then guide you in determining other important necessities such as the number of bedrooms, bathrooms and living areas required to accommodate your guests. Also, consider asking yourself, do you require any future expansions or remodelling to customise the property to suit your specific needs.
Whether you’re contemplating a coastal change or a countryside retreat, it’s vital to assess the environmental risks involved. Coastal properties may be vulnerable to natural disasters and risks such as cyclones or erosion, whereas rural getaways may face challenges such as bushfires. It is important to evaluate your ability to manage property maintenance in your desired area and put in place suitable measures to mitigate risks.
If you plan to lease the holiday home, there may be tax advantages associated through depreciation and running costs. Tax considerations should be discussed with your accountant prior to the purchase. While there may be tax deductions like depreciation schedules and running costs, it’s essential to allocate funds for routine upkeep and replacements. Budgeting for this will prepare you for any regular maintenance and replacements. Consider also investing in durable furniture capable of withstanding the demands of rental usage, in turn ensuring longevity of the property and guest satisfaction.
If you are considering renting the holiday house, you must ensure it complies with all legal requirements. Some of these legal requirements to consider include; if you are using AirBnB does the building by-laws (if strata) allow for you to have guests in? Confirming if the property’s planned usage aligns with council regulations and obtaining any necessary permits or licenses will also avoid future headaches. It’s essential to consider other factors as well such as fire safety laws, swimming pool compliance requirements and an affordable insurance policy, which will all minimise potential liabilities.
It's important to remember that the tax implications associated with owning a holiday home can significantly influence your financial obligations. As the property is not owner occupied, stamp duty will likely be higher. Additionally, factoring in potential annual land tax payments into your budget is essential. On the other hand, if you plan on selling your retreat in the future, keep in mind that you will incur capital gains tax if the property has increased in value. Assessing all these factors as well as income tax implications on any rental income generated from the property, will assist you in ensuring you’re compliant with all relevant tax laws and regulations.
Often overlooked as holiday homes are meant to be an “escape from reality” is the question of is there enough recreational amenities available to keep you occupied. Before scoping out the area understand what you will be using the holiday home for and consider whether the area offers activities and attractions that align with your interests and preferences. Evaluating amenities such as patrolled beaches, restaurants, hiking trails and other entertainment options, particularly if you intend to entertain guests or have children with you will guide your decision. Be mindful that some locations are seasonal, so it is essential to plan accordingly for these recreational facilities to ensure year-round enjoyment.
Making thorough due diligence a priority can often be over-looked when considering a holiday home purchase. Evaluate the property’s condition, title, and history to ensure it meets your criteria and fits into your future plans. A good building inspector, real estate agent or buyer's agent and lawyer will aid your due diligence process immensely. They will be able to offer you non bias yet valuable perspectives and insights to help you address any potential risks or concerns.
Buying a holiday home is exciting but it requires careful consideration. If you have any questions or would like more information about how we can assist, please call 1800 867 113, or organise a confidential discussion at a time that suits you.
Lindsay McGregor is a lawyer and the Head of Property in our Avant Law team. He has been working in property related matters for over 20 years. He was previously a partner at a highly regarded national firm and has considerable experience in property transactions across Australia. He has previously acted for some of the country’s biggest property investors and developers and can use this experience to your advantage.
Disclaimer: The information in this article does not constitute legal advice or other professional advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of this content. The information in this article is current to 21 February 2024. Legal services are provided by Avant Law. Liability limited by a scheme approved under Professional Standards Legislation. Legal practitioners employed by Avant Law Pty Limited are members of the scheme. © Avant Mutual Group Limited 2024
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Liability limited by a scheme approved under Professional Standards Legislation. Legal practitioners employed by Avant Law Pty Limited are members of the scheme.
