It seems like we haven’t had two dry days in a row for months and with Easter coming up many people are starting to think about sunny days and holidays. With this in mind, we frequently get asked is it a good idea to buy a holiday home as a property investment? Today’s article looks at this topic from a financial rather than romantic viewpoint.
Thinking about purchasing investment property? Property has produced many of the world’s wealthiest people, so there are plenty of reasons to think that it is a sound investment. However, experts agree, as with any investment, it’s better to be well-versed before diving in with hundreds of thousands of euros.
Here are the things you should consider and investigate.
1. Consider Your Comfort Level with Being a Landlord
We are presuming you are going to rent it out if you are considering it as an ‘investment’. If you wish to use it yourself as a holiday home it can be hard to buy with renters in mind. Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money.
2. Pay Down Personal Debt
Savvy investors might carry debt as part of their investment portfolio, but the average person should avoid it. If you have car loans, unpaid medical bills, or children who will soon attend college, purchasing a rental property may not be the right move.
Don’t put yourself in a position where you lack the cash to make payments on your debt. Always have a margin of safety.
3. Secure a Deposit
Investment properties generally require a larger deposit than owner-occupied properties; they have more stringent approval requirements. The 10% you may have put down on the home where you currently live isn’t going to work for an investment property. You will need at least a 20% deposit, and perhaps more in current times.
4. Find the Right Location
This is the main point which separates a good property investment from a holiday home. Most holidays homes are only easy to rent out for a few months a year, and those few months are EXACTLY the same time when you want to use it! The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. A city or location where the population is growing and a revitalization plan is underway potentially represents an investment opportunity.
5. Beware of High Interest Rates
The cost of borrowing money has risen sharply in the last two years, additionally the interest rate on an investment property will be higher than traditional mortgage interest rates. If you do decide to finance your purchase, you need a low mortgage payment that won’t eat into your monthly profits too significantly.
6. Calculate Your Margins
Vulture Funds that buy distressed properties aim for returns of 5% to 7% because they have to pay staff. Individuals should set a goal of 10%. Estimate maintenance costs at 1% of the property value annually. Other costs include home insurance, possible homeowners’ association fees, property taxes, and monthly expenses.
7. Invest in Landlord Insurance
Protect your new investment: In addition to homeowners insurance, consider purchasing landlord insurance.
This type of insurance generally covers property damage, lost rental income, and liability protection, in case a tenant or a visitor suffers injury due to a property maintenance issue.
8. Factor In Unexpected Costs
It’s not just maintenance and upkeep costs that will eat into your rental income. There’s always the potential for an emergency to crop up—roof damage due to a storm, for instance, or burst pipes that destroy a kitchen floor. Plan to set aside 20% to 30% of your rental income for all of these costs so you have a fund to pay for timely repairs.
9. Avoid a Fixer-Upper
It’s tempting to look for the house that you can get at a bargain and flip into a rental property. However, if this is your first investment property, that’s probably a bad idea. Unless you have a handy man/builder who does quality work on the cheap—or you’re skilled at large-scale home improvements—you’re likely to pay too much to renovate. Instead, look to buy a home that is priced below the market and needs only minor repairs.
10. Calculate Operating Expenses
Operating expenses on your new property will be between 35% and 80% of your gross operating income. If you charge €1,500 for rent and your expenses come in at €600 per month, you’re at 40% for operating expenses.
For an even easier calculation, use the 50% rule. If the rent you charge is €2,000 per month, expect to pay €1,000 in total expenses.
11. Determine Your Return
For every Euro that you invest, what is your return on that Euro? Look at the returns on other investment options – equities, funds etc. A 6% return in your first year as a landlord is considered healthy, especially given that number should rise over time.
12. Buy a Low-Cost Home
The more expensive the home, the higher your ongoing expenses will be. In addition, experts advise never to buy the nicest house for sale on the block, ditto for the worst house on the block.
13. Know Your Legal Obligations
Rental owners need to be familiar with the landlord-tenant laws. It’s important to understand, for example, your tenants’ rights and your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more in order to avoid legal hassles. Register with Residential Tenancy Board.
14. Weigh the Risks vs. the Rewards
Every financial decision is about weighing the rewards, determining the payoff against potential risks. Does investing in a holiday home make sense for you? Having looked at these points now consider if the holiday home is a true investment.
Maybe renting for two weeks in the destination of your choice might be a cheaper option long term.
The Bottom Line
Keep your expectations realistic. As with any investment, rental property isn’t going to produce a large monthly paycheck for a while and picking the wrong property could be a catastrophic mistake.
Carey Corbett Financial Services are experts on personal and commercial insurance, pensions, investments, mortgages, protection and financial planning. Contact Tommy or Donal at
065 689 3540 or info@careycorbett.com