Avoid the temptation of holiday homes this school holidays
With the kids set into holiday mode, investing into a holiday home might seem like a good idea with the promises of high yield, but one property commentator warns against it, claiming that these dwellings could be empty for up to years at a time.
With the temptation of high yields, Anna Porter, founder of Suburbanite said investing in a holiday home comes with it a large amount of risk, and even with the potential of short-term letting, investors could be without tenants for months and even years.
“Whilst you may find yourself away on school holidays and caught up by a smooth salesman in the local shopping centre with promises of high returns, the structure of ownership for serviced apartments is very different to a typical property purchase as you know it,” Ms Porter said.
“Instead, serviced apartments must be a part of the letting pool so they cannot be rented out privately and must go into the commercial-style letting pool which occurs through the overarching lease or through the DA.”
As an example, Ms Porter said there could be a ten-year lease to a company, like Quest or Adina, which provide higher yields, but if investors want to stay there, they need to book through the company’s own services.
Companies using this route, the property commentator warned, can be exploiting tourism zoning constraints to make developments bigger than usual and have local councils displeased as a result.
“Frequently, a lesser known second-tier company then opt to run the building and its functionalities but they typically fail at this type of venture which in some cases can lead to bankruptcy of the head lessor,” Ms Porter continued.
“After the failure has occurred the unit owners must still abide by the letting pool conditions and not rent the units privately or move in despite the units being unoccupied. It’s then a waiting game for a larger company to take over the head lease during which time, hundreds of units are left unoccupied.
“This can then result in lengthy battles with council and state governments to release the units from the letting pool which often does not happen. It is usual that during this time, the owners cannot meet the financial commitments and the mortgagees move in and take over unit-by-unit resulting in significant declines in values.”
Whether you can privately let out property in any way you like when the overarching managing company goes bankrupt is dependent on whether the letting pool structure is included in the original development application or not, she said.
If it is only in the managing agreement and not the original development application, and the overarching managing company goes bankrupt, you are free to let out the property however you wish. If it is also in the original development application however, then Ms Porter said it is most likely that nothing can be done with the unit, which includes letting it out or living in it yourself, until another serviced apartment company takes over.
Additionally, trying to get out of this situation as well is not an easy matter, she said.
"I have seen many properties foreclosed on by the lender and sold mortgagee in possession when the management company walks away, leaving the investors with the mess.”
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