This article originally published in The Northern Daily Leader on 12 April 2014.
We recently returned from a short holiday at the coast, enjoying the waves, sand and relaxed atmosphere of a beachside town. The holiday itself was not as relaxing as it once used to be; both our youngest (18 months) and eldest child (3 years) have no concept of holidays, happy to wake up at 5:30 in the morning, holiday or no holiday. Rather than lazy long sleep-ins, hours on the beach reading and day-dreaming, it was a holiday of nappies, day-time naps, evening tantrums and early morning roll-calls. Still, I wouldn’t have changed it for the world, enjoying sand-castle building, fishing and braving two-foot high waves with Jack clutching tightly to my hand. Those days at the coast gave me some time to reflect on the concept of owning a holiday home. A permanent holiday house at the beach seems appealing – spur of the moment trips to the coast; a sense of ownership; no booking, availability hassles or rental costs. The reality however can be a little bit different: seemingly endless maintenance bills; holidays spent cleaning and repairing your property; that nagging feeling that you should be making more of your investment and being overrun with friends and family just when you feel like some quiet time at the beach.
As attractive (or not) as owning a holiday home may seem, one way to look at it is through a comparison of the alternatives. For example, if you owned a holiday home worth $400,000, you always have the option of selling the property and investing the proceeds. A reasonable income return assumption suggests that you could earn $20,000 a year from your investments (potentially tax-free, depending on your circumstances). Each year you could then spend $20,000 on holidays wherever you fancy. Skiing in Europe perhaps, maybe a cruise to Fiji and back, or you could even book a cabin at Cradle Mountain Lodge for nearly three months every year. No cleaning, maintenance or other issues to deal with. On hard numbers alone, owning a holiday home seems to make little sense. Much like renting usually allows you to live in a house you could never afford to buy, selling your holiday home and investing the proceeds may allow you to have the holiday you could never afford to have. But, and it’s a big but, this argument ignores the value placed on ownership. The ‘utility’ we derive from home ownership, whether at the coast or otherwise, can often far outweigh the rational financial argument of selling up and spending the investment earnings. In finance, just as in life, emotion can be more important than the hard numbers. Making the right decision in balancing the numbers versus the emotion is as important as judging when to jump or when to duck when that big wave comes.