There is a madness that comes from being on holiday in a foreign country. Almost all thought processes start with: “Well I’m here now, and when will I be back ever, so…why the hell not?”
For me personally, this usually expresses itself in the form of:
- Enormously over-priced fine-dining moments, in the full knowledge that almost all of the price comes from the location and the view
- Expensive visits to museums because someone gave me a flyer
- Buying smart shirts in batches
At one low point, I wanted to do a day trip from London to Paris for lunch. Fortunately my lunch buddies lacked the requisite Schengen visa. Thank God.
However, there is almost no extravagance that can compare with the impromptu purchase of a holiday home.
But that sounds like I’m a bit biased. So let me start with some objective analysis.
The Qualitative Pros and Cons
Here’s the good thing about holiday homes:
- You get to tell people that you have a holiday home.
- Visiting your holiday home takes out some of the immediate financial sting – after all, you don’t have to “pay someone else’s mortgage”* by renting a house and/or paying for a hotel room.
*Far and away the best marketing ploy ever invented by a real estate agent.
Here are some bad things about holiday homes:
- Every time you go on holiday, you feel compelled to go to the same place.
- And if you don’t go to your holiday home, you feel doubly guilty.
- You spend most of your holiday time discovering all the unexpected repairs that you need to make, thanks to:
- Holiday tenants who appear to have had a thoroughly raucous time in your home;
- Useless caretakers and agents;
- The weather (the tropics have hurricanes, the mountains have snow, and anything seaside has left your window frames corroded by salt);
- The year that has passed since you were last there.
- Any time you sit on a piece of your furniture, you wonder who else has sat on it, and what they were doing on it, and someone hand me the bleach.
But that is just the soft stuff. Let’s talk about the numbers.
The Quantitative Bit
So here is the general justification for the financialness of a holiday home ‘investment’ (as detailed by the tanned and gleaming estate agent that’s swishing you around in a haze of blue skies and white teeth):
- Buy this place.
- It’s a great investment.
- You can visit once a year.
- And you rent it out for just one week a month to cover your mortgage repayments.
- Your holiday home will literally pay for itself.
- Free holiday!
- *flawless toothy grin*
The “no free lunch” adage only really kicks in when you’ve signed the bottom line, however. Because:
- You rarely buy holiday homes in areas that draw tourists all year round. Meaning that “renting it out for one week a month” is extraordinarily difficult, actually. Of course – you could make up for it by renting your place for the 12 to 15 week high season – but that’s probably the time that you want to be there, so…maybe not.
- The other thing about tourist towns is that you rapidly discover that you are the host to your parasitic host town. Your big city dollars are the bread to be won. Meaning that your levies and insurance are going to be high. Very high. After all – you don’t really have a choice. And you’re not really around for long enough to search for alternatives.
- And actually, while we’re on that point, repairs! If you have bought a place that has a high season, it makes for a slightly awkward market for repairmen – they have a concentrated period of time when everyone wants them (the high season), and then there is the rest of the year when they have to subsist on the work provided by a largely empty town/village. Most people prefer constant work – so you’ll find that the only repairmen that will stick around will be those who manage to make enough in the high season to cover them through the rest of the year. So you’re looking at expensive repair costs that you can’t quite believe.
- Alternatively, you’ll find that your village repairman is a blood relation of your caretaker, and that you’ll be relying on your caretaker to undertake the necessary repairs at your cost. Emphasis on “cost”.
- High costs lead to higher insurance premiums.
- And in all likelihood, your insurance broker is also a blood relation of your caretaker…
- Your caretaker is going to be charging high commissions (some estimates that I found suggest a 25% cut).
The only way to avoid that is to buy holiday homes that draw tourists all year through. But the trouble is – that type of investment is one that is going to be in high demand. So you’re facing some high property prices. And mostly in places that you wouldn’t like to own a holiday home.
So I went looking for some numbers to work with. I found this:
“The average rental return does not exceed 2-7% annually for most holiday destinations.”
A 2% return?
That is almost less than inflation.
Consider this back-of-the-napkin example:
- Let’s assume that you buy a holiday home in Knysna for R1 million.
- You’re paying interest on your mortgage at 9.5% (because you’re credit-worthy).
- You’re earning 2% in net rentals.
- That’s a R75,000 loss for the year.
If you took that R75,000 and booked a luxury family room at the 5 Star Table Bay Hotel in Cape Town with a mountain view at R4,250 per night – you’d get to stay in Cape Town for 18 days.
Effectively, for free.
In fact, it’d pay you to do it. Because you’d also get breakfast and free wifi.
Just think about that.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.