The holiday home romance

We all know the feeling. The sun is shining, the waves are lapping peacefully on the shore, there’s a cool ocean breeze wafting gently through your hair and the crisp sand is etched between your toes.

Sometimes you wish your holiday romance could last forever.

Technically it could!

Hundreds of thousands of Australians own their holiday getaways. With the temptation to escape the daily grind, a holiday home can be a very rewarding purchase.

But do holiday homes make a good investment?

When it comes to investing in property, it’s easy to let your emotions rule. However, before you make any snap decisions you should consider the benefits and risks associated with this kind of purchase.

 

The benefits

  • Free accommodation when you go on holidays.
  • You will have a home-away-from-home with unlimited access (depending on tenancy arrangements).
  • You can rent your holiday home out for the portion of the year that you don’t intend on staying there to help mitigate some of the costs. This can be particularly beneficial during peak seasons.
  • Your holiday home may increase in value over time. The potential for capital growth on property investments is generally higher than that of cash and fixed interest investments depending on the property.
  • You can claim a tax deduction for expenses incurred in maintaining your holiday home for the period of time it is rented out.

 

The risks

  • Occupancy rates fluctuate. Strong demand for holiday homes is on average around 8 to 10 weeks per year – and this is dependent on location. Demand for homes in a warmer climate is more consistent (especially if it’s beachfront).
  • If you rely on income from peak holiday seasons you won’t be able to use your holiday home during these times, e.g. during school holidays.
  • You may need to take on a significant mortgage as holiday homes can be quite expensive.
  • On top of the initial cost of buying the property you will also need to consider the costs of maintaining the property, including management fees.
  • Any net rental income earned and assessable capital gain when you selling your holiday home will be taxed at your marginal rate.
  • If there is a property market downturn, holiday areas are generally the first to suffer and the last to recover. If you have chosen an area, do thorough research on past cycles and how they have affected local prices.
  • You might get bored visiting the same place over and over. On top of this, you may even feel guilty if you holiday somewhere else!

 

Investing in any type of property is a big decision. When considering purchasing a holiday home, you should try and think a little less with your heart and a little more with your head. Seek professional guidance before making any big decisions.

Ethical investing – putting your super where your heart is

Millennials – take a bow. Not only are you concerned about how your super is invested, you are more likely than any other age group to act on your beliefs when choosing a super fund.

Research commissioned by the Responsible Investment Association Australasia (RIAA) reveals that 75% of Millennials prefer to invest in a responsible super fund than one that only considers maximising financial returns. Well ahead of Gen X on 66% and Baby Boomers on 68%.

Across all demographics, the proportion of people who would rather invest in a super fund that “considers the environmental, social and governance (ESG) issues of the companies it invests in and maximises financial returns”, as opposed to a fund that focuses solely on maximising returns, has risen by 27% since 2013.

That’s a significant trend which sends a clear message not only to superannuation and investment fund managers, but also to the wider corporate community – people care about more than just profits. They also want their investments to contribute to the greater good.

 

What makes an investment ethical?

Ethical investment funds may use positive screens to select companies that are doing ‘good’ things, or negative screens to exclude companies doing ‘bad things’. Or they may do a bit of both.

There are, of course, different views as to what is ‘ethical’. Someone with strong religious convictions may be interested in a very different range of investments than someone with deep environmental concerns. Typically, though, ethical funds tend to avoid investing in companies involved in weapons manufacturing, alcohol, tobacco, gambling or fossil fuels while favouring renewable energy companies, sustainable technologies or healthcare.

Even then it can be difficult to decide if a particular company is ‘good’ or ‘bad’. Many people avoid investing in companies that mine uranium, but those same companies may also extract the materials needed to build wind turbine towers. Or a bank that finances coal mines may also lend to solar farms and energy efficiency projects.

Given the wide range of ethical considerations, you may need to do some in-depth research to find the fund or funds that best match your values.

 

Is your fund doing the right thing?

While you may have an ‘out of sight, out of mind’ attitude to your super, it’s important to remember it’s your money and you get to choose where and how it’s invested. Start with your fund’s website or disclosure documents and look for the environment or/and social and governance section.

Most large super funds offer a range of investment options, only some of which may match your idea of ‘ethical’. However, there may be a direct share option, allowing you to construct your own portfolio of shares in companies that are compatible with your values. Or you may look to the increasing number of investment managers that apply ethical filters across their entire range of funds.

 

Advice moves with the times

Fortunately it’s becoming easier to track down the investment funds that suit you with advisers more switched on than ever to the needs of the ethical investor. Talk to your adviser about the issues that are important to you so they can help you invest your super suited to your preference/heart’s content.

 

Sources:
“From values to riches. Charting consumer attitudes and demand for responsible investing in Australia.” Responsible Investment Association Australasia https://responsibleinvestment.org/