Buying a coastal retreat may drag some onto the rocks, writes John Collett.

Now the Christmas holidays are well and truly behind us and it is back to the grind, our minds can turn to whether we should buy our own little holiday heaven.

While buying a weekender by the seaside can be a great investment, the potential trap is it could be done more for lifestyle reasons than for investment reasons.

Nothing is wrong with buying for lifestyle if you accept it will probably be a drain on the family finances rather than a money-spinner.

If it is for lifestyle, forget about spending time at the beach house over the Christmas-New Year holiday period. School holidays are when it can attract the highest rent, so it may be better to rent a beach house.

While owning a beach house is tempting, it could become a nightmare if bought for the wrong reasons. Short-term lettings require a lot of work from the owner and the letting agent.

Some short-term tenants may be ready to party, risking damage to the property and good relations with the permanent population. And negative gearing the holiday accommodation might not be worthwhile. Negative gearing occurs when the interest costs on the mortgage and other expenses are greater than the rent and the shortfall reduces the investor’s income on which income tax is paid.

Renting out for just a few weeks of the year can mean copping the losses without getting much of a tax break. That is because the Tax Office allows only deductions on a pro-rata basis for the period the holiday house is genuinely on the rental market.

Most owners will want to sell the property and reap capital gains, or at least have the comfort of knowing it could be sold for capital gains. But the poorest-performing property markets are the coastal regions.

Property researcher RP Data recorded the proportion of properties being sold for a loss during the last quarter of 2012. The researcher found the initial price paid for each property and compared it with the sale price during the quarter. RP Data says coastal regional markets incurred the greatest proportion of loss-making property sales of all property markets throughout Australia. Queensland’s Gold Coast, Sunshine Coast and far north (which includes Cairns) regions recorded the greatest proportion of homes selling at a loss over the quarter.

Capital gains may be harder to come by down the track, when the thrill of having bought a bit of paradise has faded. A hard-headed investor is probably better off buying an apartment not far from their home city’s centre, where there is rental demand and better prospects for long-term capital gains.

Posted by John Collett – The Age on 6th March, 2013