Holiday Homes
- Part 2
This is the second part of a three-part talk about holiday homes.
Let's have a look at what it costs to own a holiday apartment, and how
much it costs to rent one, and see if we can come to any conclusions.
The last time I dealt with this topic was in January 2012. Back then an
average two bed apartment in Southern Europe was on the market for
about €85,000 - €95,000. The vendors would no doubt take €75,000 to
€80,000. That was last year. This year I've no doubt the prices are
lower again. I haven't done a recce since just before christmas, and
the market was sagging then with virtually no deals being struck. My
own view is that prices will come down another €20,000, and they will
do that over the course of next 2/3 years.
So the first point to make is: if you dont have to buy right now, wait
and see. The golden rule in property purchase is: Dont buy a falling
market. All over Europe markets are falling. Time is on your side. You
should be looking to buy a pretty average flat for around €50-60
thousand. A really nice one would probably be a good buy at €90-100
thousand. Anything more expensive than that would have to be
spectacular, or simply too expensive.
Okay, having got that out of the way, let's compare prices for renting
and buying.
Let us assume for the sake of argument that you can buy a nice two bed
apartment in reasonable condition roughly where you want to be. We
aren't talking front line to the beach. We aren't talking about the
golden mile, we are simply looking at a nice place in a pleasant area.
Let's assume a purchase figure somewhere between my two ideal prices,
say €75,000. That kind of price is achievable right now if you bargain
and are patient. It will be common in a year or two's time.
Most of my readers are in the UK, but I'm going to stick with euro
prices. But here we have to take into account two types of buyer. The
first is a cash buyer, and the second is a buyer requiring a mortgage.
By and large it doesn't make a jot of difference when doing the maths
whether you are paying up front, or you are on a drip. I'll tell you
why.
If you are paying cash you have to take on board the simple situation
that once you had cash and no flat, now you have the flat but no cash.
You have done a simple exchange. However, unless you are careless with
your money (in which case why are you reading this?) you will now have
obtained somewhere to live in exchange for some income. If you have had
€75,000 stuck under the mattress, then all I can say is 'more fool
you'. Money is worth money. Dont believe me? Ask your bank manager for
a loan and see how he prices up the money.
I get on average 13%+ for my money. I dont know what you get, but for
the purposes of this article I am going to assume you get the same as
the cost of the money you borrow, or could borrow if you wanted. For
the moment, that figure is approximately 5%. A euro mortgage would
probably cost about 4%. A UK mortgage would probably cost about 5.5%,
and so on. Let's compromise and stick with 5%. So not only is the cost
of any borrowing 5%, but the opportunity cost of the cash you would
spend on a holiday home is going to be the same.
Okay, you have now spent or borrowed the equivalent of €75,000. The
real cost of that spend is (75,000/100)*5 = €3,750 a year.
On top of the purchase price you will have had to pay solicitor's fees,
tax, land registry charges, and so on, so by the time you actually get
to sit on your balcony you will probably have had to pay at least
€80,000. Let's do the calculation again. (80,000/100)*5 = €4,000 a year.
Now you are the proud owner you will have maintenance costs and general
repairs. You will also have to buy furniture, and maintain that. This
alone will put your initial purchase price up another £5,000 even
if you just buy the basics, so that €4,000 a year has now gone up to at
least €4,250. You will also have a rates bill to pay every year. That
will probably add at least another €500 onto your outgoings.
If we are comparing like with like we will have to add in service
charges, which you would not be paying if you rented a property. I find
gas prices are low, but electricity is going to cost you another €50 a
month. That's €600 a year.
Let's have a look at what you would be paying if you bought that flat.
You are losing the use of that €85,000, so your opportunity cost will
be roughly €85 a week. Let's say your electricity costs another €10 a
week, which is lower than reality. Now add in another €10 a week for
the rates, and perhaps another €20 a week for repairs and renewals, but
that also seems a bit light to me. However, that totals €125 a week.
That is the real cost of this flat you've just bought.
Now let's look at the use you are going to make of this place. It's a
holiday home, so you will in all probability use it for about a month a
year at most. You are paying €6,500 for your holiday accommodation
every year. Sounds a bit steep to me.
You may think you can rent out your place, but before you factor that
into your calculations do have a look at some rentals first and count
up the empty weeks you see. If you are lucky you will get 10-12 weeks
of rental a year. If you are unlucky you will get 0-8 weeks. I think
the risk/reward ratio is simply not good enough. And if you rent out,
then you have extra costs in terms of service charges, agent's fees,
and a lot more on depreciation and renewals. You might break even if
you are lucky. Is it worth all the hassle?
If this is your retirement home, then that is a different matter. You
will have swopped your money for your home. That's okay. After all, you
do have to live somewhere.
But if this deal is meant to be for your holidays then look at the
other side of the equation. Someone recently asked me to check out
holiday rental prices in the Algarve for them. Sure, there are loads of
prices up in the thousands, but there are also loads of prices between
€100 and €150 a week. Let's just put the actual price bang in the
middle at €125 a week. That equals €500 for a month's holiday rental.
Even if the cost is twice that, it is nowhere near the €6,500 which is
the cost of the purchase. Even if you lived in the holiday home for the
whole year (in which case you'd pay a reduced rate anyway) it would
still not be more expensive than the purchase cost.
Renting is a far more sensible option than buying. Dont buy a holiday
home. It is a complete waste of money.
There are three other reasons for not buying. The first is simple. Do
you really want to spend every holiday in the same place? What about
visiting different countries? Having different experiences? If you
holiday somewhere else for a change you are effectively charging
yourself for two holidays while only taking one.
The second reason for not buying is the problem of selling. Sales of
holiday homes have always been slow, even in the good times. That's
because in the good times people buy new homes that are on offer at
tempting discounts, with tempting mortgage deals, and free furniture
thrown in, and so on. You wont be able to compete.
The third reason is that you can use the money you've kept in a more
profitable way, and that means you will be able to afford a better
standard of holiday. I'll talk about that next week.
john