Woooo! Analysis number 10! I’ll try and make it a good one.

So this week, I’ll be sticking with the off-the-plan theme, but looking at an inner-city apartment. This one has a little twist though. Whilst we’re reaping the usual benefits of an OTP purchase, investigated in last fortnight’s post, we can also aim for significant cashflow benefits if we use this property as a holiday rental.

Turns out this OTP property in Adelaide is centrally located, with agent estimates of rental income looking quite attractive. I’ve worked on the following figures for rental income:

  • $450 a night for peak period (6 weeks), at 70% occupancy rate;
  • $250 a night for shoulder period (4 weeks), at 70% occupancy; and,
  • $180 a night for off-peak period (42 weeks), at 50% occupancy.

Had a chat to the agent about those estimates and they’ve been confirmed as realistic, based on their general holiday rental data for Adelaide, and taking into account the prime position of the real estate and the 3 night minimum stay (or 7 nights for peak period).

So, the combined benefits of the OTP purchase (almost no stamp duty, depreciation benefits) and the holiday rental setup (excessive rental income) neatly cover the rental expenses. When you also consider the additional depreciation for a furnished property, my figure shows that our investor might average an extra $85 in the pocket per week from positive cashflow; about $4,400 for the year.

It’s certainly a nice setup, but as usual, I should point out the risks.

Those agent estimates appear to be pretty reliable, but there are so many factors that could affect either the occupancy rate, or the nightly rent. One of these in particular, is how active you (or your agent) is with managing the property and getting tenants on board. In my opinion, you should make sure that you’re conservative with your estimates and factor in higher costs than you might expect. I’ve increased the cleaning, maintenance, body corporate payments and property management fees, as well as the interest rate we’ve found that many lenders won’t offer the standard variable rates for higher-risk properties like this one.

Also, you’ll get a much broader range of tenants coming in and out of the property. This is unfortunately increasing your chances of, at some point or another, renting the property out to that tenant that we all dread; leaving the apartment an absolute mess, late rental payments, even skipping town without payment!

While there are things we can do to minimise the chances of this happening, such as requiring a deposit upon booking, there’s still an element of risk there. Make sure you’re comfortable with that before you jump into a deal like this. And while the average rental income is positive, you can expect long periods where you are behind the eight-ball due to the seasonal nature of the income.

So, have you had any holiday rental experiences, or known someone who has? I’m very curious about this one, so I’d love to hear from you if you’ve got anything to share.