Holiday home prices still soft so is now the time to buy?

Prices of holiday homes in some prime seaside locations are still soft, after big falls in the GFC, making them relatively attractive to some investors.

They will also appeal to buyers wanting a lifestyle property to use for holidays - and perhaps retire to - plus some income to help pay the costs.

Statistics from the Domain Group show that areas such as Coffs Harbour and Port Macquarie in NSW, the Sunshine and Gold coasts in Queensland and the Bass and Surf coasts in Victoria have recorded sluggish price growth over the five years to December 2014. In some hotspots, such as Noosa Heads, prices have fallen.

Investors should be clear about what they want to achieve. If you plan to retire by the beach and have all the benefits of negative gearing in the meantime, you may be able to pick up a relative bargain on a holiday home and rent it out permanently for a few years.

Or you may want a place you and your family and friends can use from time to time but still earn some income and also benefit from some tax breaks.

The appeal of the latter strategy is that you can charge much more for short-stay holiday accommodation than for full-time rentals. Some experts say a good rule of thumb is to aim for a property that covers one month's mortgage with one week's rental income.

Make sure your rental expectations are realistic by researching websites such as stayz.com.au and homeaway.com. These also give you an insight into how much competition there is for tenants.

It's essential to accurately estimate the costs of renting out your property for short-term stays. It's much harder to undertake the essential services - cleaning, housekeeping and maintenance - yourself if the property is a long way away.

If you do want to attempt to market it through sites such as airbnb.com.au and those mentioned above, you will need to set up a local support network for the day-to-day running.

You could use a local real estate agent, broker or management company but be aware that some charge up to 18% to 20% of the rental income, and extra for housekeeping and maintenance services. You might be able to engage a local person looking for casual work for considerably less.

With holiday rentals there is greater risk of damage and theft, as well as longer vacancies. A landlord insurance policy provides protection for short-term rentals of up to 12 weeks and costs between $299 a year in Tasmania and $410 a year in NSW, says Belinda Butler, distribution manager for Terri Scheer Insurance.

If you want to claim some tax deductions, make sure you keep good records. Usually the tax office will allow you to claim only for periods when your property was genuinely available for rent, and may want proof to substantiate this.

And when it comes to depreciation there is a myth that a fully furnished holiday home will attract a 4% building allowance, as opposed to the usual 2.5%.

"This type of accommodation does not fall into the short-term traveller accommodation category, which attracts the accelerated building allowance" says Tyron Hyde director of quantity surveyor Washington Brown.

Record keeping is essential to minimise capital gains tax if you sell. When calculating the cost base, factor in legal and finance fees, maintenance and running costs.

Capitalise on your home equity

If you purchased your home a few years ago, you may have built up a reasonable amount of equity, particularly as interest rates have steadily declined and, in many cases, property values have increased.

There are various ways to capitalise on the equity in your home, the most obvious of which is to access the funds to renovate or purchase an investment property.

Another smart way to save money and benefit from the equity in your home is to refinance your mortgage.

If you have 20% or more equity in your home (or a loan-to-value ratio of 80% or lower), you may be an attractive customer for lenders who offer incentives such as discounted interest rates to refinance with them.

Effectively, a low loan-to-value ratio gives you significant buying power from lenders keen to attract customers with high levels of equity in their home - so shop around for the best deal.

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