With the rise of DIY holiday rental sites like Airbnb and Stayz, holiday rentals have quickly become a popular alternative to standard permanent rental. If you pick the right location and property, holiday rental income can exceed a traditional long-term tenancy income. We take a look at the pros and cons of renting out a holiday home and how the home loan application differs to a permanent rental investment property.
Holiday rental properties pros and cons
The first factor to consider is if the property is somewhere people want to spend their holiday. Always check the level of demand for the property’s suburb on Airbnb, Stayz and with local real estate agents.
Pros
- Opportunity for high yield and capital growth – key for investors. Income is often higher than permanent rental if occupancy rates are consistent and location/market is appropriate.
- Property owners can also use the property for holidays (talk to your accountant to discuss potential tax implications)
- Potential property to live in when retired
- Potential taxation benefits
- Consistent holiday income and future bookings can help increase value of property when you choose to sell
- Local real estate agents can manage the property and bookings for you to maximise occupancy, time and profit
Cons
- Set up costs including furnishing the property can reduce profit
- You’ll need a cash buffer to cover the mortgage during off-season and non-peak periods where occupancy rates are low
- Property damage can go unreported due to irregular tenants
- Management and cleaning fees can reduce profit, however these costs are often added to the booking fee
- Banks have tighter credit criteria for holiday rentals as apposed to permanent rentals due to instability of income
- Holiday rentals either with a history of income or under a management agreement aren’t suitable for purchasing in an SMSF (Self Managed Super Fund).
- Like any investment property, Capital Gains Tax may apply when you decide to sell (speak to your accountant)
- Self-management of a holiday rental can be a full time job!
“The requirement to provide a concierge service is quickly becoming an essential requirement as more owners realise the value of afterhours service, security, concierge & linen services.”
Central Coast holiday leasing
The Central Coast has always been a popular hot spot for holiday makers, in fact the region took out number 1 spot for the highest booking revenue in Australia according to Stayz in 2014.
Income can vary from suburb to suburb and is also dependent on your occupancy rates. Airbnb provides a rental calculator which can provide an indication of potential income based on their bookings in a particular suburb.
Average Airbnb income from an entire home with 4 guests per month (based on 50% occupancy rate)
- Copacabana $2,917
- Macmasters Beach $2,894
- Avoca Beach $2,792
- Matcham $2,662
- Wamberal $2,661
- Forresters Beach $2,655
- Patonga $2,569
- Pretty Beach $2,529
- Killcare $2,527
- Terrigal $2,428
- Killcare Heights $2,232
- The Entrance $1,908
- Ettalong Beach $1,460
Cathy Baker of Belle Property Killcare and Wamberal says the Central Coast holiday rental market is growing quickly. “Many owners are enjoying lucrative returns and good capital growth on their holiday rental properties. The extra bonus is being able to enjoy the use of the property in between bookings”.
Cathy highlights that holiday tenants are becoming more selective, due an abundance of choice, and in some cases, due to bad experiences in poorly managed private accommodation. “The requirement to provide a concierge service is quickly becoming an essential requirement as more owners realise the value of afterhours service, security, concierge & linen services.
A professional vetting service of guests is essential, especially with Airbnb, and we recommend setting large bonds to reflect the quality of your home, and holding landlord insurance that covers you for holiday tenants to protect owners against any bad tenants.
Many homeowners are very trusting with regards to leasing out their home to tenants who haven't been vetted, with no bond. In many cases we have heard of owners incurring terrible damage to their homes, due to not having the right procedures in place,” said Cathy.
Self-management of holiday homes can often be a false economy and utilising the services of a holiday booking agent is the best way to achieve a great income, without increased risk to your property.
Belle Holidays offers a fully comprehensive holiday service with maintenance, cleaning, linen, security and concierge on call. Guest can enjoy having all activities and restaurants booked prior to their arrival, food delivery in the fridge & fresh linen on the beds.
Owners can relax knowing every aspect is being managed professionally and the property checked, cleaned and secured.
December 2017 figures from Core Logic shows the median rent for permanent tenancy on the Central Coast is $459 per week. When the figures above in Copacabana equate to $673 per week (at 50% occupancy), we can see why holiday rental is so popular on the Central Coast!
How to get a holiday home loan
Finance for a holiday rental property is a little like a self-employed application. If the property has an established history of income for at least 2 years, (some banks will accept 1 year income history), then the income can be used as part of the loan application. However, if the property hasn’t generated income previously, then proposed income won’t be accepted by the bank/lender.
In most cases, a permanent rental income is the best approach in order to secure finance for an investment property. A real estate rental appraisal combined with a bank valuation will provide the bank/lender with an accurate market rental figure, that can be used as proposed income to support the home loan.
You may choose to change the rental strategy after the property has settled, however you should ensure you have sufficient cash flow to cover the mortgage repayments during the vacancy periods.
Buying a holiday home in a SMSF (Self Managed Super Fund)
Unfortunately, the ATO thinks holiday homes are a little too risky for an SMSF, (but trading in derivatives is fine… go figure!). Therefore, buying an investment property that is either under a holiday rental management agreement, or derives its income from short-term holiday rental, isn’t allowed. This is mainly because the income is sporadic and not consistent enough. So, unfortunately, you’ll need to keep your holiday homes in your personal or company position.
Central Coast mortgage broker
If you’re thinking about buying an investment property for either permanent or holiday rental purposes, speak with the team at Mint Equity, Central Coast mortgage broker. We’ll help guide you through the process, find the right structure that suits your need and the right lender to keep your costs low.