Do not let your heart rule your head when buying a holiday home

Over the last few weeks we have seen a number of property experts discussing the matter of holiday homes which is perhaps especially prevalent for those in the UK looking at places such as Spain or Portugal. As we know, the European property market as a whole has had a very difficult time of late and even though Spain and Portugal are showing signs of recovery there are concerns that the ongoing Greek debacle will derail this fragile recovery. Is it time to look at holiday homes in places such as Spain and Portugal?

Choose your area carefully

Whether you are investing in stocks and shares, antiques or real estate, it is vital that you do not let your heart rule your head. If you are buying a property purely and simply as a holiday home, and not an investment, then this is a whole different ballgame but if you are buying a property for both, then you need to be careful.

The vast majority of us, obviously, will buy a holiday home in an area which is very personal to us. It may be an area which you have visited time and time again, it may hold special significance or you may just be following the crowd. This is one area where people do tend to lose their head when looking at a long-term investment because it is not always the main attractions which perform the best. As we saw during the recent real estate collapse, it was the more prominent coastal areas of Spain and Portugal which suffered the most, areas which attract the largest numbers from the expat community.

Be wary of rental yields!

If you have looked at a property home overseas you will likely have seen an array of very attractive rental yields. Many people fall into the trap of assuming these high rental yields are available for 12 months of the year when in reality it may be very different. Can you imagine being able to charge relatively high rental prices in the coldest months of the year when tourism is at its lowest?

You also need to take into account the fact that if you are buying a property as a holiday home, and to rent out when you are not there, would you be happy making use of YOUR home during the less popular periods of the year? The chances are you would want to make use of your property at the peak season when you are able to charge the highest rental prices. Slowly but surely, taking into account seasonal fluctuations on rental yield and the fact you would likely want to use the property in the peak period, you can see your expected investment return diminishing.

Currency risk and additional costs

When looking to acquire property overseas there will always be additional costs because it is very unlikely you will personally know somebody in the region who can look after the property when you’re not there. As a consequence, it is likely that you will need to make use of professional services which are not cheap and can again eat into your expected return. If we also throw the currency risk into the mix then slowly but surely the risk reward ratio begins to tilt in favour of additional risk.

Conclusion

While there is no doubt that many people do make a significant return on their holiday home investments you need to be careful, not let your heart rule your head and ultimately if the property is for investment purposes then do not use it during the peak period. If on the other hand the property is simply a holiday home, where you will spend a significant amount of time during the year, perhaps any income from third party rentals should be seen as a bonus? Decide exactly what you are after, choose the location carefully and above all continually monitor the situation. Do not take your eye off the ball!