With the colder months rapidly approaching, it can be tempting to daydream about a bolthole in the sun. A peaceful sanctuary for the winter months, and a lucrative rental asset for the summer.
While this may be a dream come true, there are a number of practicalities to consider, and it certainly isn’t for everyone.
In this guide, we explore the pros and cons of investing in a holiday home.
You can save money on holidays
If you love a destination and plan to visit it regularly, you could save several thousands each year in accommodation costs. It can also make it easier to jump on a plane and escape for a weekend when you wouldn’t normally do so.
But…
Owning a holiday home may mean you miss out on other travel opportunities as you are tied to one location. Accommodation costs are only one part of the package – you will still have other costs, which may be even higher if you are travelling more often than you would otherwise. You will also have other costs, such as cleaning, maintenance and insurance that could quickly erode any savings.
It’s an extra source of income
The purpose of an investment is to make money. A steady rental yield from an asset that you can also benefit from is even more rewarding. With websites such as Airbnb and HomeAway, it has never been easier to market your own property to holidaymakers.
But…
There is no guarantee that the property will be let consistently, and any empty periods will eat into your profit. One bad review, however unreasonable, could impact on guest appeal. Most holiday destinations operate seasonally, so you would need to time your own visits for the less profitable off-peak season.
Not all guests will treat your home as they would their own, and you may find yourself with unexpected repair or legal costs. A good insurance policy is vital.
Remember that any income you receive is taxable. If you have not completed a tax return before, you should seek the advice of an accountant, as certain costs can be set against the income and reduce your tax bill.
It will appreciate in value
Property is often a sound investment, providing you choose wisely. The value is likely to increase over time and the price will not fluctuate daily in the same way as a share or investment fund. You can also add value by improving the property, providing these enhance the appeal to guests.
But…
Property is not a liquid asset and it may not be easy to sell when you need to. It can also be difficult to decide when to sell if you are not living in the location full-time.
You should also take the exchange rate into account, as the pound is not particularly strong at the moment and you may not get as much for your money as you hope, particularly in Europe. If the pound rises, the property would be worth the same in the local currency, but less when converted back to Sterling. Of course this means that if the pound drops further, the sales proceeds would be worth more in Sterling.
Brexit is another point to consider, as it may impact on your potential guests’ holiday plans. More people may opt to stay in the UK if travelling to the EU becomes more expensive or inconvenient. This may make British holiday destinations in places such as Cornwall more appealing – the trade-off is that properties in these areas can be more expensive anyway as they are desirable places to live.
A holiday home should not be considered purely in investment terms, as historically property has not increased in value as quickly as shares and certain investment funds. It is also more difficult to re-invest the income. It would take many years of rental income to accumulate enough money to buy another property. Share dividends can be re-invested to buy more shares much more easily, compounding the growth potential.
You will have the option to retire abroad
Retiring abroad is the ultimate goal for many clients, as they have a better quality of life in sunnier climates. Mild winters, balmy summers and morning walks by the beach can be very appealing, particularly when facing an early morning commute in heavy snow. If you already own a home abroad, and have been immersed in the local culture at different times of the year, it can make the transition far easier.
But…
It’s important to seek legal advice, and make sure you are familiar with all of the local tax implications. For example, a second home in the UK may incur additional Stamp Duty of 3% (4% in Scotland) in addition to the standard rate. Similar pitfalls may apply in other countries, or on returning to the UK after living abroad. There may also be restrictions on what you can do with the property in certain locations.
It may be appropriate to have a Will in your chosen country, as the estate laws could be different from the UK.
It may seem apparent from this guide that the negatives far outweigh the positives. In factual terms, this may be true. If making money is the sole motivator, there are certainly easier methods.
But buying a holiday home is an emotional decision, driven by the love of a place and the memories that can be created there. It is not as simple as ticking off a checklist, and can be far more rewarding than simply putting more money in an ISA.
If, after reading this guide you still want to go ahead and buy a holiday home (and are prepared to take advice and make all the sensible decisions) it may well be the right choice for you.
This guide is created for information only, and does not constitute financial advice. Please do not hesitate to contact a member of the team if you would like to discuss further. Contact us today on 020 8366 4400 or enquiries@cedarhfs.co.uk.