What are the risks of making an investment property double as a holiday home?

Having your own little getaway is an idyllic proposition, evoking powerful imagery of sun-swept beaches, tree-lined rivers, bush walks through the mountains or simply sitting in a cafe and watching the world pass you by.

The end of summer is the peak season for holiday home purchases, often with one eye shut on the financial impact and return.

Unfortunately, the supposed holiday house often morphs into a quasi-investment property during the property selection process. This mutation can result in financial heartache.

Even if you decide to take a mixed-use approach, it’s important to be clear about your top priority. This sharpens your focus in the property selection process, as well as providing clarity for your ongoing approach to managing the use of the property.

How does owning a holiday house affect your finances?

A holiday house is likely to come with extra debt, costs for a personalised fit-out and furnishings, money spent on improvements and a reduction in your cash-saving buffer, coupled with minimal or no income.

Discuss with your partner or family what you are giving up by purchasing a holiday property. You may find this means fewer holidays to exotic locations around Australia or overseas, less time visiting family and friends and reduced cash flow.

It may be better to budget a generous amount every year for holidays, than to purchase a holiday house.

Buying a holiday house may also lead to a reduction in your borrowing capacity, equity and savings, which may restrict your ability to invest in the future or upgrade your family home.

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Investing in a property with higher capital growth can mean more wealth in retirement. Photo: Jordan Gellie

The long-term costs of a mistake can be significant

Holiday houses tend to be owned in locations that may experience a transient population, have fluctuations in demand, are more affected by downturns and tend to be located outside of major cities.

Limited capital growth is more common in locations that are less attractive to owner-occupiers who make up 70 per cent of all property ownership. This can be debilitating to wealth creation and a silent killer that only becomes apparent after 10, 15 or 20 years.

To put this in perspective, the difference between 4 and 6 per cent annual growth on a $600,000 property results in 33 per cent less wealth over a 20-year period, meaning $609,808 less in the kitty.

Is owning a holiday home worth the time commitment?

It can become a logistical nightmare planning for and finding free weekends in between social lives, sporting and other pursuits.

If you have school-age kids, weekends fill up quickly and often take precedence over mum and dad’s needs. All of a sudden the getaway feels more like a chore than a break and is a lot less frequent than originally planned.

And who looks after the property when you are not there? Mowing the lawns and managing the garden will come at the cost of your hip pocket or your most precious commodity, time.

Be realistic about how often you will visit your holiday home. Photo: iStock

If you decide for a hybrid holiday-investment approach, leasing the property will add extra time, effort and mental energy in dealing with property managers, finding a tenant and maintaining the property.

There is also a risk that the property could be untenanted for most of the year due to a lack of interest, your requirement for short-term tenants only, or your desire to make use of the property during peak seasons.

How to make the right decision

It is paramount that you have a long-term plan, know your financial end goals and work backwards to understand how a holiday house may affect your ability to achieve your goals.

You do not want a mixed focus resulting in a holiday house that you do not enjoy spending time in and is a poor investment choice to boot.

Once your plan is finalised, you can be clear on your strategy, allowing you to narrow in on the property selection. Most people start with property selection and totally skip planning and strategy.

Should the holiday home win out, you enhance the likelihood that you purchase a property you genuinely enjoy spending your time in, ensuring family holidays don’t get overtaken by the desire for rental income.

When you boil it all down, if there is a possibility that you will spend some time in the holiday house, it is likely that your decision is primarily a lifestyle choice.

Alternatively, you may decide that an investment play is the best way forward. The key here is selecting a property in the right investment location, rather than a hybrid approach that could see you buy in a location where you love holidaying, but has little investment upside.

Adequate planning is paramount to ensure your holiday home is a property that you enjoy visiting, can hold for the long-term and provides years of happy memories. A successful outcome in your property selection is dependent on you having a clear plan and strategy from the start.

David Johnston is the founder and managing director of Property Planning Australia.