OWNING A HOLIDAY HOME VERSES RENTING

So, yet again I have had a long weekend away. I honestly don’t wish to brag, it’s just that I managed to book a heap of weekends away for the second half of the year. I am thanking my past self for being so organised and now I almost feel like I have a weekend apartment on the beach. Alas it shall be ending soon, and I fear that next year will not be as exciting when it comes to relaxing weekend getaways.

Over a couple of beers we talked about the costs to actually own a weekend apartment on the coast, verses the costs to just pay for accommodation.


I figured it would be a good example to work through the benefits/costs of owning a holiday apartment, verses renting.

Warning: numbers ahead!

Scenario 1- renting

Assume that every second weekend you spend 2 nights at the gold/sunshine coast in a 4+star resort or hotel. Basically you are living the high life.

Nightly approximate rate: $200 per night

(200 x 2) x 26 = $10,400

So then, not taking into account the extra costs involved, ie food, travel etc, the approximate yearly cost to go to a hotel every two weeks is $10,400 per year. That is quite the hefty figure.

Scenario 2- owning

 Cost price

$300,000

Assume you borrow

$250,000 @ current variable rates

Assumed bills (water etc)

$2,000 pa

Rates

$1,500 pa

Body Corporate

$2,000 pa

One off stamp duty

$7,000

Interest and capital repayments

$17,940 pa

 

 

So, after purchasing the apartment, not including the start up costs of stamp duty, the approximate yearly cost is $23,440 per year. This is obviously waayyy more than renting an apartment discussed above. You are essentially keeping another home running. Now I suppose the extra costs seems worth it as you have an investment, but if you are not renting it out to others, you can not class it as an investment for tax purposes. Therefore, all of the above costs can not be tax deduction.

You would be taking the gamble that the capital value of this unit would increase over and above the current value, plus all the costs that you have incurred for owning it. And it sure is a gamble, house prices can be volatile as history shows us.

So, to continue the case study, say you sell the property in 10 years time for $400,000, will you make your money back?


Sales price

$400,000

Less
Current value of loan after 10 years

$209,056

Stamp Duty

$7,000

Accumulated costs throughout

$241,400

Total gain or loss

– $57,456

 

So, if you went through all of this, you have made a loss of $57,456 on owning the apartment for 10 years. This doesn’t take into account any real estate fees, or any maintenance work that needs to be done to the apartment. I have not included insurance costs or potential costs to furnish the apartment. You can see that it is really starting to add up.

As the sale isn’t an investment loss, it can not be used to your advantage to offset against other investments.

Although on the upside you can always brag to your friends that you have a holiday home I suppose.

Now we can compare this to going to a hotel every fortnight for 10 years and the accumulated cost would be $104,000.

Comparing the two, owning an apartment would put you in a slightly better position, and if you have the funds to cover it, this may be something that you would consider.

If however you are buying the apartment as an investment, you better feel pretty confident that the eventual sale price will work in your favor.  From the above, this investment was not really an investment at all. You really do have to dig deeper before jumping into something like this.

To me, this is not the best investment I could make. Maybe one day when I am swimming in cash I’ll buy a holiday pad, but it’s likely not.

Whilst I don’t think I can justify staying at a hotel every second weekend, I am going to stick to weekends away. There is always a bargain to be had, and the added benefit is the variety of being able to kip up at different locations. I am happy to drive anywhere within 2 hours from Brisbane, and let me tell you there are a lot of beaches and getaways within that radius.

* These are assumptions only and based on the current variable interest rates with the use of basic home loan and stamp duty calculators.

– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.

Posted in: Investments and Cara Brett

About the author: Cara Brett

Cara Brett proudly heads up Bounce Financial - founded in 2014 after a successful, decade-long career in the financial services industry. Cara’s experience encompasses both the financial product and financial advice sides. This gives her a comprehensive and holistic knowledge of all facets of financial planning.