Taking a holiday from conventional investments can bring dual rewards

It's summertime, and the living is easy, unless of course you're thinking about buying a holiday home this year.

If the decision is carefully considered and researched, however, the short-term stress of buying a second home may lead to long-term rewards for your family.

More families are opting to return to the same destination each year to recreate a family tradition, to put the increased equity in their primary homes to work, or strictly for convenience and comfort.

When thinking about buying a second home you should bear in mind the location.

The wisdom of this decision depends on each family's individual circumstances but the main residence mantra "location, location, location" is just as true for those purchasing a holiday home says Denis Howell, an auctioneer with Warren Estates in Gorey, Co Wexford.

"The first thing they need to do is choose a location - South-East, North-West, West for example - then look at their purse and see the extremes they can go to for a holiday home. Next, they should approach different auctioneers in that area and remember that it's well worth it to shop around."

He suggests applying for brochures then making a shortlist of six properties for viewing.

Its a good idea to look at different areas where property is cheaper. "It's not always the high density areas that are the nice ones," said Mr Howell.

Once you have chosen a location, decide if it's better to buy or build a home.

"If you can get a site, which is becoming more difficult, you can do what you want and it's much cheaper. However, that idea is starting to fade as these site prices have trebled in the past few years," said Mr Howell.

One of the most important considerations when viewing that adorable cottage by the sea is why are you buying the home. Put aside romantic notions of life in rural Ireland and determine the realities of your family's situation.

"Many people buy a holiday home and use it for weekends. If it's rented that defeats the purpose of using it for themselves. Others are only in it for the rental but unless they're just renting for the high season, when rents are very good, the rents for the rest of the year are nominal," said Mr Howell.

Some people buy these homes or apartments as a "pension plan" or a way to cut their tax bill. Unless they make a well-educated decision based on a thorough examination of all the variables, including what would happen should interest rates increase, this may not be a good reason to purchase a holiday home.

People should make a candid evaluation of how much time they'll be spending in the holiday home suggests Mr Richard Eberle, of REA Mortgage Services.

"If they're making an effort to purchase they should think where are they in terms of family life. If the kids are younger, yes it's a good idea, if the kids are older no, it's probably not," he said.

Ask any current holiday-homeowner about the reality of the situation and they will tell you there are management headaches to deal with, furniture purchases to make and maintenance issues to resolve. "You have a second home that you're running including maintenance and insurance bills. It's similar to your own house but on a smaller scale," says Mr Eberle.

Later on, when people realise they are not using it they think about renting it but this means more intensive input, he said.

More homeowners are hiring management agencies to rent out the home and cleaning services to sweep up after the visitors. If anything goes wrong, the services of a plumber, electrician or builder may also be required. All these services cost money and should be included in any pre-purchase estimations.

Of course, holiday homes are not a strictly doomsday scenario and they may provide generations to come with many enjoyable memories if the decision is well considered first.

Mortgages for holiday homes are not difficult to obtain. "Like most mortgages, lenders look at the ability to repay," says Mr Eberle. "Most holiday homes are in cheaper areas than the primary home. It comes down to the same type of criteria when buying your own home," he says.

Many homeowners use the equity built up in their primary home during the property boom to take out a top-up loan from their bank or building society. This money then goes towards a down payment on a holiday home. Since the rates for these loans are much lower than other lending options this is one of the most economical ways to purchase a holiday home. However, purchasers are still locked into two mortgage payments.

If one partner needs to stop working due to illness, child-rearing or loss of a job there may be difficulty repaying these loans. Couples should always have a contingency plan should this situation occur. They should talk to the lender about their options.

After deciding on a location, buying or building, and the purpose of the home, look at your eligibility for tax allowances.

The availability of properties that qualify for these tax schemes is becoming more difficult says Mr Howell. "You should think about designated areas although most are gone. Some still come in under the section which allows for the rental income only on the holiday homes but many of those will end by June," he said.

Most holiday homes are not a good idea from a tax viewpoint. "There's no interest deduction for loans to purchase the property unless it's a qualifying property in a designated area. More important is that the disposal of the property is subject to Capital Gains Tax (CGT) for any profit made," says Mr Jim Ryan of Ernst & Young.

This is an important consideration when it comes time for the children to inherit the property as the gain in the value of the property and the CGT due may be higher than the original purchase price.

If a holiday homeowner rents out the property some deductions may apply. "If letting it out, rents are fully chargeable to income tax and there's no deduction for interest. You may claim deduction for a management expense, cleaning, repairs and maintenance and any expense of a capital nature like fixtures, fittings, carpets, furniture," says Mr Ryan.

If the property is treated more like an investment, other allowances may be possible. "If it's permanently let out you may claim a 15 per cent allowance for six years and 10 per cent for year seven. So if you paid £10,000 (€12,697), you may receive an allowance of £1,500 for years one through six and then £1,000 for the seventh year. The profit on rent is charged at the individual's top rate of tax plus the health contribution which is 2 per cent. The rate of Capital Gains Tax is currently 20 per cent," he said.

Tax allowances available for holiday homes are based on the property's location. For example, some apartments in Bundoran, Co Donegal qualify for Section 48 tax relief which provides allowances against all income including PAYE. Phase one of a project on the main street is selling for £120,000 plus VAT with £5,000 guaranteed rent per annum.

A similar scheme in the area boasts three-bedroom semi-detached bungalows for £151,500 including the fit-out net of VAT and a guaranteed rental income of £7,500 per annum (net) for 11 years.

In Courtown, Co Wexford, many homes qualify for section 23 tax incentives on all rental income within the State. One such development offers houses from £69,950 for a two-bedroom and £94,950 for a three bedroom.

Some investors are escaping Ireland's uncertain weather and property market by buying holiday properties abroad. Quite a few businesses have sprung up to meet the demand and advertise themselves as "specialists" in purchasing homes in certain areas abroad. A two- or three-bedroom apartment in Marbella, Spain was recently advertised for £95,000 with "excellent potential for capital appreciation and rental income".

Others advertise "quality properties" in Spain or Florida from £50,000. Properties situated on golf courses in sunny climes are popular.

Buying abroad is particularly risky, not only because of the distance and expense of travel, but because purchasers may not be aware of the different laws and requirements related to buying a property in that country. It is also very difficult, if not impossible, to determine if management and cleaning agencies are actually performing the promised services before you pay the bill. Sometimes problems with the property may only be resolved by a costly and time consuming trip to the holiday home area.