Should you Invest in a holiday home?

Ramón Wernsen,  Tuesday, 29 August 2017

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You see them more and more often, advertisements with texts such as: 'Investing in a holiday home, with a guaranteed return of 8 percent'. A sound investment, therefore? Are there any hidden land mines? "There are a few reservations to be made before advising a customer to make such an investment, especially if they use borrowed money for it" observes financial planner Ramón Wernsen.

It seems easy to earn money for your clients: you buy a holiday home on a holiday park, you rent it out for you, and you receive an 8 percent return. But, is it a must? Those who still have some money money on their bank account and are just back from holiday, where the wine tasted well under a bright blue sky, may tend to want to invest in a vacation home. But: there is no free money. "The more return, the greater the risk. Your customers should always be suspicious and not tempted by attractive brochures" says Ramón Wernsen.

Check the vendor

The first step you take is an audit of the vendor of the property you buy and who rents it out for you. With whom do you do business? There are significant differences in this respect. How solvent is that party? Is there sufficient equity capital? As a buyer, you should investigate. By googling you will often find reactions from other buyers. And when you read forums, you'll see a lot of lawyers offering themselves:"Hire us, if you're dazed by a holiday park."

Check the premises

According to Wernsen, the second step is to bring along a buying agent to estimate the value of the property. How is the construction? Is the property still standing in ten years' time? If you pay too much, you may get your return, but when you sell the house, it pays much less. Check also how long the interest rate is guaranteed: it may only be a few years. What happens next?

Anticipated versus realistic return

Another aspect that buyers of holiday homes often do not take into account is the costs. There are some costs, such as property tax, water board tax, insurance, maintenance costs and the depreciation on house and furniture, which you have to deduct from the return. How do people leave the house behind? And who will pay the compensation if something breaks down? These are legal things that you have to consider carefully. And make sure that the renting organization assumes that the house is always rented. That is a utopia, even in a perfect location. Also, does the pre-matched return only come from rental? Or is it a combination of a direct return from letting and indirect return from the proceeds of sale? Depending on the park, it may be that you only have 2 or 4 percent of the expected 8 percent. If you have an idea of what the net return will be, you can make a better assessment of the risks.

Location location location location location

Where do you buy it? As with ordinary real estate, it is better to invest in an excellent location. You pay more, but it is determining for the expected value development and gives you a better chance of good and long-term rental. Choose a location that is popular with tourists.

Advice to your customer

How do you advise a client? See why someone wants a holiday home. Do they see it purely as an investment or do they want to enjoy it for themselves? If it is just an investment, why do you choose a holiday home? Because that is safer than equities? Or simply because the interest rate is low? What is their motive? Indicate that customers will not be able to realize the pre-matched return. And if you realize it at all, only for a very short time. Also, think about the turnaround time for sales. In an ordinary house, it is a few months. For a holiday home, it sometimes takes two years before you have sold it. If you suddenly need the money, it takes longer to turn the house into cash. This is different for an equity portfolio: it will be on your account the next day. And remember that the current generation of youngsters is much less attached to property: music streaming them on Spotify and a rental car is also fine. Do you lose your home in the long run?

Mortgage or no mortgage

Another aspect is whether additional funding is needed. Anyone who has to take an extra mortgage on their own home will invest with borrowed money, the interest of which is not deductible.

This article of Kop-Munt is subject to a Creative Commons 4.0 International (CC BY 4.0) license.
Based on Beleggen in een vakantiewoning: wel of geen aanrader?.

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