How to make a holiday house your haven, not a financial hell

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Ah, the holidays. The beach, chilled vibes, good times.

The feel good factor of a great holiday has been known to lead to some rash decisions when it comes to purchasing property. While it’s tempting to secure your own little slice of your favourite holiday destination, there’s an awful lot of consideration that needs to happen pre-purchase if you want to be sure your holiday home is the site of happy memories rather than hellish ones.

Let’s get down to brass tacks. There are generally two ways people come into ownership of a holiday home. The first is a holiday property that’s been in the family for many years which is inherited or shared with parents and siblings. The second is a holiday home that’s been purchased for the purpose of being a place to get away from it all.

The first scenario should be a blessing, but in plenty of cases it can be a bit of a curse. Without clear agreements about who can use the house when, and how much each family member is expected to contribute towards maintenance, things can head south pretty quickly. I’ve seen elderly parents sell the family holiday house because they’re sick of their adult kids arguing like toddlers over usage, and/or because they won’t pay their share of the maintenance.

The second scenario is where you really need to do the math. Let’s say for argument’s sake that you’re looking to buy a modest weekender at Blairgowrie for $631,000 and you plan to stay every second weekend for two nights and for around 20 days of the school holidays. Sounds pretty solid, right?

Time to crunch the numbers. Assuming you’ve got 70 per cent debt at 5 per cent of the $631,000 purchase price, that’s going to cost you $22,000 a year. Add to that another $8,000 for rates, insurance and basic maintenance and you’re up to an annual outlay of $30,000. That’s an expensive asset.

Very few holiday home owners use the property for more than 72 days a year which works out to $416 per night. See where this is headed?

 

Making it work

For most people, a holiday house is an expensive luxury, but there are two ways to make it work for you:

  1. Rent it out for peak holiday periods
  2. Co-own with friends or family

 

Renting it out

If you choose to go down this path, know upfront that you’ll have to spend money to make money. Because the property will need to be presented at a much higher standard, you’ll need to factor in additional costs for maintenance, gardens, furniture, fittings and linen. Don’t forget the letting and cleaning fees either.

 

Co-ownership

When done well, co-ownership gives you the best of both worlds. In fact, I’ve seen much greater success with co-owned holiday homes that are purchased by family or friends with an upfront written agreement (who stays when and who pays what), rather than those that are inherited or casually shared with families.

The main advantage of co-ownership is that sharing the cost with others gives you the chance to buy a second home that would otherwise be impossible to buy on your own.

 

More advantages:

  • Pooling your funds to contribute the initial equity in the property
  • Combining your borrowing powers to secure finance on the best available terms
  • Sharing the initial cost of purchasing the property
  • Dividing the expenses and net rental income from the property in various ways
  • Accessing a greater range of potential investments
  • Paying the mortgage off quicker and increasing net return.

 

That’s not to say that it’s all sunshine and rainbows—there are still risks involved. If you dive into co- ownership without a clear, detailed plan then chances are you’ll encounter strained relationships with your co-owners in the not-too- distant future.

To do it well, it’s essential that everyone has clear expectations. That will require not only discussions between the potential co-owners but also a written agreement that outlines the details.

Some of the key co-ownership issues you’ll need to sort out upfront and put in writing are:

  • Contribution of purchase funds
  • Title and ownership structure (I’d suggest a tenants in common structure)
  • Usage rights
  • Expense allocation
  • Management
  • Bill payments
  • Tax advice
  • Death
  • Exit strategy, including option/s for remaining co-owner/s.

Just a heads up: the most common cause of tension in co-ownership arrangements is usage. The best way around this is to specify alternate weekends, then taking turns for Christmas, Easter etc.

The second most common source of conflict is expenses. Here I’d recommend a sinking fund for maintenance and an up-to- date cash flow document so that everyone can see what’s going on.

It takes work, but co-ownership can give you the best of both worlds: a holiday house to call home for a portion of the cost that it would take you to go it alone.

 

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