Holiday Homes
- Part 3
This is the third part of the mini series about renting a holiday home
as opposed to buying it.
This is where people seem to be missing out on the amazing
possibilities that are available at the moment. Let's start by looking
at the economic situation, and the banks in particular.
Times are tough, and the banks aren't lending. Interest rates are on
the floor, and inflation is averaging anything from 7%-11% in the USA
depending on which stats you look at, and it is in the range of 1%-3%
across Europe.
Now let's look at the other side of the coin. In the USA base rates are
0.25%. That means if you are a lender you've got a problem. If you even
lend money at 5% you are losing out big time if inflation is even just
7%. If it really is 11%, lending money at 5% is a mug's game. That is
blatantly obvious.
In Europe things aren't quite so bad, but they are still not good for
lenders. Inflation in the UK is about 2.7% at the moment. Base rate is
0.5%. Gilts are returning around 2%. Right at the source the business
model is a losing one. In order to make money banks have to load the
rates.
There is a serious problem here which is not going to go away any time
soon (that is until something cracks). With interest rates on the floor
and inflation above 2% there is simply no sound business model in the
lending industry. That means lending has gone away from the banks, and
the niche has been filled by other organisations. But the important
point for us is that money has suddenly become difficult to lend. The
returns on borrowed funds are simply not bringing in a great enough
return to justify the risk. This creates a distorted market, and throws
up lots of opportunities to make money by using money. In short, to
create liquidity, which is needed for the wheels of business to turn,
someone has to lend, and because the market is restricted, the private
rates are high. That is good news for those with money to lend.
This means that anyone who cares about a return on savings would be
silly to put savings in the bank. We've just seen that banks are in a
mess. They have debt problems which means they are not all that safe in
the first place. They also dont have a firm business lending model, and
lending is how they make most of their money. That means putting your
savings in a bank equals putting your savings in the worst sector. Why
on earth would you want to do that?
That means you need to look elsewhere. This is not going to be a
blueprint for savings. I am not going to tell you what to do with your
money. Instead I am going to give a few examples of the kind of returns
that are out there, and we will use those returns to measure what value
you would be getting from owning a holiday home.
There are various ways you can place your money so that it produces a
decent return for you. Even at a very simple level you would look to
invest in income bearing stocks on any market set-back. In 2009 I
invested in an interesting stock in the US which was paying a 17%
dividend. There are not many of these about, but there are stocks which
are issued by companies that gear their entire existence around
creating dividends for retirees. You dont have to have retired to hold
the stock, but there is no reason why you cant invest in a stock that
pays, say, 5%. That's not much, but if you were going to put
£100,000 into a holiday home, and instead you invested in that
stock, you'd get £5,000 a year in dividends. Would that not pay
for a rather nice few holiday weeks? Remember, we are only talking
about the accommodation cost.
For £200 a week you could get luxury accommodation virtually
anywhere. With your £5,000 dividend you'd be able to afford 25
weeks holiday a year. That's enough isn't it? And you'd still have your
savings. Of course, most accommodation doesn't cost anywhere near that.
In most areas you can get quite comfortable accommodation for
£500 a month. Your dividends would fund you for 10 months. That's
quite some holiday!
However, that's a worst case scenario. Supposing you invested in
something that paid out a lot more than that. I'm currently invested in
a bamboo scheme. Last year it brought me in 6%. It will be 7% this
year, and is expected to rise to 18%. With that return you could
holiday in prime properties in the south of France, or simply take an
average holiday home, and use the rest of the money to fund your
retirement. Remember, 18% on £100,000 equals an income of
£1,500 a month. Half would get you a really nice rental apartment
or villa, and the other half you could live on. It's more than the
average state pension.
In my monthly magazine The Big Pension I give examples of these
investments. Last month there was a whole clutch of rental properties
going for sale. I featured more than twenty of them going to auction.
The returns ranged from 40% a year down to 13%. There were plenty more
below 13% but I only feature returns in excess of that figure.
Another bulletin featured hotel accommodation in the US oilfields.
These returns start at 25% and go up to 45% p.a.
And if you want something terribly simple, how about a stock that is
currently paying an 11.76% dividend? The company has raised the
dividend by 14.54% over the past 5 years. This isn't a long term deal,
but for the short term it's a nice easy return for absolutely no effort.
For a final example let's have a look at property itself. Let's say you
like owning property and think it's a great hedge against inflation. If
you have that £100,000 you could buy a two bed semi-detached
house and rent it out. Admittedly you'd now have a job on your hands,
but you are the one who likes owning property.
Spend the money, buy the furniture, tart the place up a bit and rent it
out. You can probably charge £750 a month, which will bring you
in £9,000 a year. If you put aside 10% of that for repairs and
renewals, and 10% for management, your net take would be £7,200.
That is equal to a 7.2% return on capital. That means you have the
asset, and you are getting almost three times the return you'd get from
putting the money in a deposit account at the bank.
That £7,200 will pay for 12 months of a holiday rental at
£500 a month, and still give you change, so why would you want to
buy that holiday home? It makes no commercial sense.
And if you seriously think that £500 a month is absurdly cheap
you should be looking in the local papers in any holiday resort
anywhere around the Mediterranean. Such long term deals are everywhere.
Even if you dont want the place long term, you may find you get a
better deal by renting for four months than you do by renting for four
weeks.
My point is that these deals are out there and they are not
particularly risky. But at the moment I am simply concerned to show you
that returns of 5% plus on cash bring you a better lifestyle together
with that rental holiday home, than simply buying the holiday home.
The secret is to make your money work for you. I have always taken a
very simple view of money. I worked hard to get it, now it's got to
work hard for me. If it isn't getting me a comfortable return then it
is slacking on the job. 3% is derisory. It barely keeps up with
inflation. 5% is poor. 10% is beginning to get somewhere. And you can
get it if you try, as that famous song reminds us.
And if you are interested in my monthly magazine
The Big Pension, do sign up for these
13%+ returns on your money.
john