Think it through before investing in a holiday house

Did you fall in love with your holiday destination this summer? Many people do and some are tempted to buy their own slice of paradise.

Imagine! A holiday house in your favourite location which you can visit as often as possible, plus earn an income on the side! It sounds too good to be true and it usually is.

Don't get me wrong - there's nothing stopping you from buying a holiday home if you can afford it and that's how you choose to spend your money.

But do not fool yourself that it's necessarily going to be a good investment.

One of the main reasons Australians invest in property is for the tax breaks but, if your vacation property is not available for rent for a fair chunk of each year, these will be limited.

And you had better make sure your idea of paradise is shared by a lot of people.

If not, then you may struggle to get vacationers to rent out the property. Before you jump in, first ensure you are really going to be content to holiday at the same place year in, year out.

If the answer is yes, next establish how important it is that the property also produces a return and provides tax breaks. If these factors are vital you may even have to rethink exactly where you buy. Ideally it should be within a two-hour drive of a major CBD because this will attract weekend tourists.

And you should never buy any property without considering what will happen if you sell. There will always be greater buyer demand for areas close to cities and their amenities, such as airports and good hospitals, than out-of-the-way destinations.

It's wise to seek out areas that have access to cafes, cinemas, shops and tourist attractions.

You also need to factor in the cost of furnishing and fitting out the property to an appropriate level for the type of accommodation it provides.

If it has a large kitchen, this can be a draw for families, but it needs to be well equipped to attract repeat visits.

And when you are working out what sort of return you might receive, you need to take into account that maintenance and refurbishment costs for vacation property are higher because of increased wear and tear.

Management costs are usually also higher because, if you are unable to personally service the property between tenancies and be available in case something goes wrong, you will have to pay others to do this for you.

You will have to include the rent you receive in your annual income calculations.

When it comes to claiming deductions, you cannot claim for any expenditure incurred for the periods when the home or unit was used by you, your relatives or your friends for private purposes.

So, for example, if it's privately occupied for a quarter of the year you can claim deductions only for three-quarters of your interest payments, rates and other expenses.

You can claim the agent's management fees as well as cleaning and repair fees associated with letting out the property.

Even if it is not tenanted for the entire nine months, you should be able to claim deductions for that period as long as you can show it was available to be rented.

To maximise your benefits, draw up a schedule in advance of when the property will be available.

Make sure this is shown clearly on any letting website and that any agents handling the property also have this information.

Property focus

Did you know that 10% of Australia's private housing stock is not used on a regular basis?

Respected property researcher Michael Matusik revealed this in one of his regular research missives. This equates to 935,000 private dwellings and is an increase on the 830,000 unoccupied dwellings in 2006.

"It seems a waste if you ask me," Matusik writes, pointing out that two years ago he raised the possibility that instead of a baby bonus the government should have implemented a housing bonus, giving owners an incentive to fully utilise their housing assets.

"Frankly, a stick would be better than a carrot, with much higher land tax being charged on those residential properties not under regular occupation," Matusik writes.

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