Holiday homes can be a questionable property investment

As many Australians feel the pinch approaching the holiday season, lifestyle properties such as serviced apartments and holiday homes are hitting the market.

While holiday units and lifestyle properties can offer lucrative yields and a dream lifestyle, they can also be a costly investment.

As an investment strategy, they can provide short- and long-term rental income when not occupied by the owner but it is also common for holiday unit investments to stay vacant for months, if not years, especially serviced apartments.

Holiday makers often forget that the structure of ownership for serviced apartments is very different to a typical property purchase.

Serviced apartments must be a part of the letting pool, so they cannot be rented out privately and must go into the commercial style letting pool that occurs through the overarching lease or development approval (DA).

How does the serviced apartment lease work?

An overarching lease, for example a ten-year lease to a company such as QUEST or ADINA, provides a higher yield for investors but if you wish to stay there you must book through their services.

More commonly, it is in the DA, which often is simply a way for the developer to utilise the tourism zoning, frequently to the discontent of local councils.

Often a smaller company opts to run the building and its functionalities but they typically fail at this type of venture, which in some cases can lead to bankruptcy of the head lessor. Unit owners must still abide by the letting pool conditions and not rent the units privately or move in, despite the units being unoccupied.

Investors then play a waiting game for a larger company to take over the head lease, during which time hundreds of units are left unoccupied.

There are many instances where the owners cannot meet the financial commitments and the mortgagees move in and take over unit-by-unit resulting in significant declines in values.

Unfortunately, there isn’t an easy way out when it goes bad and I have seen many properties foreclosed on by the lender and sold mortgagee-in-possession when the management company walks away, leaving the investors with the mess.

Buyers need to also consider the insurance cover for their holiday rental.

The duration you plan to rent out the property alters the insurance type, and the price, contributing to ongoing costs such as regular cleaning and frequent upkeep.

For properties intended to be rented out for 90 days or longer, landlord insurance is required, whereas there is holiday let insurance for shorter term rentals.

Loan structures also differ for these types of investment purchases and often the buyer will end up needing a bigger deposit.

Holidays homes not the best investment

My best advice is to stay well away in the first place unless you can absolutely afford to do so. There are plenty of solid investment opportunities around the country that do not come with strings attached.

If you do have an appetite for this type of risk then opt for a serviced apartment that has the letting pool structure in the managing agreement as opposed to the original development application.

This will mean that if the overarching managing company goes bankrupt and walks away from the agreement you can let out the property privately, or on a platform such as Airbnb, or live in it.

However, if the letting pool structure sits in the original DA then it is most likely you will not be able to do anything with the unit – not even rent it out or live there – until another serviced apartment company takes over the head lease.