The pros and cons of self-managed holiday rentals

I’ve spent considerable amount of time in the US in the last six months; both as a holiday-renter in Hawaii and as a short-term-stay, ‘business-traveller’ in Los Angeles. During these visits I’ve had some great exposure to the self-managed holiday rental property market not as an investor, but as a tourist renter.

The time spent got me to thinking about self-managed rental investment properties and produced a list of pros and cons if you are considering this leasing strategy for your rental property.

Pros

• Gross returns can be lucratively higher than residential home property investment.
• Property types that can achieve this aren’t just restricted to ‘holiday rentals’, whereby you buy into a scheme such as a time-share condo, or as part of a resort investment, but also well-located, private properties.
• You are the ‘direct manager’ of your property, enabling you to save money on management fees. This can create a greater chance of a property being positively geared and returning better revenue.
• Online services such as AirBnb and TripAdvisor enable you to affordably find short-term tenants easily and securely. This means that investors could consider coastal properties that are not part of any specific resort complex as potentially high-return short-term-stay, self-managed, investment properties.

Cons

• Though gross returns are higher, sometimes net returns are not as great due to increased management fees eating away the revenue. For some properties the returns might even be less than a traditional domestic investment property, but with more management work (i.e. your spare time) required.
• Seasonality. In Australia this is a big deal. Take for example holiday properties in the south or Tasmania. Demand may be great in summer, but those returns achieved in summer may not average out over a financial year to be very good, when accounting for the quiet times during winter.
• Running costs. One of the biggest challenges in Australian holiday property is that most properties are part of complexes with extortionately expensive management costs. So, above and beyond the standard strata, council, and water rates you’d need to pay, there are cleaning/housekeeping costs, higher owners strata rates to pay for pools, additional staff, and so on, to be aware of.
• Seaside property maintenance. Unlike residential housing on the coast, where the sea air eats away and the pretty paint work yet the property can still be rented as-is, seaside holiday resorts need to look immaculate at all times, to ensure the resort remains desirable for future guests and this comes at a significant cost to owners.

Further Considerations

Taking Hawaii as an example/case study; I believe some locations offer solid investment potential for those open to the concept of remote self-management and some different options both in terms of ownership structure and costs, as well as supply and demand. Here’s just a short list of observations I made, through asking some locals and concierge staff some questions:

Some locations offer solid investment potential for those open to the concept of remote self-management

Climate

Climate plays a huge part to the overall financial success or failure of a rental property of this type. The beauty of a place like Hawaii is that for almost every month of the year the climate is pretty much the same, year-round. This means that demand for holiday property is consistent all year long, with no real dry-spells; i.e. very low vacancy rates. Australian holiday rental properties in a year-round climate are harder to source.

Demand for the area

With a domestic population of 350 million and growing, Hawaii is highly appealing for domestic US holidaymakers. This is an important area to pause on. Solid domestic tourism participation is important in any country – Australia included – because these holiday makers aren’t affected by currency exchange variations when they travel. This makes travelling in your own backyard constantly feasible.

Australia on the other hand has a small domestic population, making holiday rentals higher risk because of our reliance on international tourists to rent the properties. Our fluctuating currency suddenly becomes an unknown that is difficult to account for in your investment.

Exclusivity:

A place like Hawaii is expensive to fly in to from any location in the world, not just Australia. This isolation mixed with strong desirability creates a near-unique opportunity for Hawaii more-so than Australia to attract only affluent holiday-makers.

With a more affluent audience occupying the properties there is reduced risk of damage to properties and other problems that can occur when a location is not as exclusive. Insurances of course always need to be considered for any property investment; however, policies are often more affordable when an affluent rental tenant occupant (even short term ones) are quoted on.