Fully furnished, short term rentals in Chch - $ to be made?

[Wiz]

Here in Chch I have heard 3 seperate anecdotes of people renting out their fully furnished 3 bed houses for between $150 and $400 a night.

This has got my juices flowing and having just crunched some numbers, at even 50% occupancy, and 100% mortgage there's what looks like a decent 15% return on offer at current property prices. I was thinking do this till the demand drops and use the income to pay down the loan, then turn it into a long term rental and take advantage of the improved returns due to a lower mortgage, and use the equity to fund future invesments.

Is anyone on here doing this, or has anyone done it?

What is the collective's advice on considering such a venture?

[eri]

if you are going to do it

make sure to do it as flatmates?

so nothing is covered by TA and their pathetically 1-sided dispute process

[Keys]

Or, as a commercial (ie. like a hotel) situation.

[ream]

If you're a CPIA member, talk to Kim Willems (president). She'd already made it her business pre-quake. Believe she does it as Keys suggests.

[hawkeye]

We were doing it prior to the earthquakes. A house in Edgeware Rd (now to be demolished) as a commercial short term rental (Holiday House). It was very successful. 300+ days a year occupancy and we were averaging about $900 a week for a house that would rent for about $380 in the traditional way.

In the past we've done similar ventures in Mt Victoria Wellington and Martinborough.

What you have to remember is that:

You are responsible for the utilities and in the winter the power bills were huge and you can't really regulate them.
You have to be available to do cleaning between guests or regularly if the guests are staying long term.
The washing of bed linen is time consuming.
You have to be available to let people in to the property or devise a suitable method for them to get the key.
A credit card facility is desirable.
Advertising organisation and presentation are the keys to success.
Budget for much more wear and tear than you would accept for a normal rental.

In short it is not a hands off money making venture but done well can provide a good premium over and above the returns you can make on a short term rental.

If you are in Christchurch Wiz and already have suitable properties then it might well be a goer. If you are in another city then from experience it is far more difficult.

If you want to discuss anything PM me for contact details.

Neil

[ream]

Don't forget to look at the GST implications as well.

[Wiz]

Cheers for the input. I was thinking of a sort of hotel booking scenario, but hadn't gone any further than that. It is certainly more time consuming, but having done a bit more digging today it is certainly very profitable if done correctly. Hawkeye - you bring up some valid points. If we were going to do it, I was planning on some robust, good quality furniture/ whiteware etc, along with Sky TV and wireless internet as they seem to be quite a draw, but of course there's the cost involved. I'll flick you a PM if it looks like this is a go-er.


We are in Chch, and after some quick thinking we have made an offer on a place, but just now found that as our own house - with all the equity (or so we thought)- is now classified in blue green, the previously generous bank has gone away for a long hard think before taking on the risk. This could well be a long term problem for us and does not bode well if they turn us down - it'll be 3 years + in my estimation before this blue green fiasco is sorted and we'll miss the opportunity to do this.

Ream - do you have an idea on what the GST implications could be? It's not even something I had considered!

[ream]

Well, normally motel-type rent would be GST-able, whereas RTA-type rent obviously isn't. You'd have to look at your expected annual turnover and may have a choice as to whether to register for GST or not, in the entity that bought and/or ran the property.

Advantages - ability to claim GST on inputs, including property itself if being bought for a GST activity, but not mortgage interest of course which is probably your biggest cost.

Disadvantages - extra paperwork & accountancy including high chance of increased interest from IRD in your affairs, possibly extra hassles buying/selling the property, possibly lower lending as the bank may only want to lend against GST-exclusive price, rents having GST taken off the top (you can't charge more to the customer just because you have GST to pay).

I'm sure Rosco or somebody with professional knowledge can chip in here & plug any gaps. That's just an off-the-cuff starter of things to look into.

Oh, and there may be implications for insurance. If they decide it becomes a commercial property rather than residential, the policy you'd normally be able to take over from the previous residential owners would no longer be available. Businesses are being caught by this apparently when they're moving into houses because their other premises have been stuffed. Major problem obviously.

[hawkeye]

Hi Wiz,

A few comments. Our house had both WIFI and SKY and they are a big attraction especially WIFI.

The Green / Blue land thing is a killer as we are in the same situation and you are right about the extended timeframe for it to be sorted. You are not the first person I've heard of where the bank are reluctant to take a Green / Blue property as security.

Ream makes some good points about GST and Insurance.

If you let for periods longer than 30 days (might be 28 days, memory not good on this point) then there is no GST to pay as it meets the criteria for residential which is a zero rated activity.

The GST threshold is $60,000 per annum before you are obliged to register. You would have to be really successful with one house to be forced to be GST registered. If you are a wage and salary earner there is nothing much to worry about but if you have other income from GSTable activities eg a small sole trader business in your name then the income from the house has to be added to that and then the threshold might be reached. If the ownership structures are different then you might need an accountant to explain the associated parties’ aspect of tax law.

As I'm sure you are aware insurance is a huge problem in Christchurch at the moment but Vero did allow us to change the holiday house from commercial back to residential post the February Quake and before the house was written off in a subsequent shake. As they already have the risk for the property they will probably be willing to change the nature of the cover but probably not the amount.

Good luck with your endeavours and if you want to have a chat give us a PM.

Neil

[Wiz]

Cheers Ream - that's good to know. I reckon we'll come under that threshold though. If we do clear 60k I will be ecstatic!

Neil, I've dropped you a PM

[AlanaChch]

Hi Wiz

I was planning to do the same but being in Green blue zone proved it impossible to borrow from the bank using the equity in the existing house. I tried directly with the bank and through a mortgage broker but no luck, even though my house and land are fine with no liquifaction whatsoever!
But if you manage to get a loan i'd recommend to list your short term rental on airbnb.com, lot's of travellers use that site.
Good luck!!

[DazRaz]

I've borrowed using a severely damaged green/blue house as security. I do have other properties and my LVR is good.

They certainly expressed some nervousness.

[ream]

FWIW these are the conditions ASB gave me for any lending against TC3 earlier this month:

'TC3: Full house insurance for the property, with the insurance company covering the cost of repairing the building and strengthening the foundations if needed. An EQC report or building report must be provided showing the extent of damage. A building report will be required defining damage to property paying attention to foundations; this report needs to be dated post 23/12/2011. If the building report shows there are foundation issues then an engineers report will be required advising what damage has taken place and what strengthening will be required to meet the new Department of Building and Housing guidelines. Establish who will be responsible for the foundation repairs and strengthening. The property must have full House Insurance with no exclusions and confirmation of whether the policy covers the repairs to the foundations if they are earthquake damaged and require repair or replacement.
Also details of the EQC claim.'

Which makes it sound as if a TC3 property without foundation damage would be reasonably easy, but for TC3 WITH foundation issues you'd potentially be waiting many more months to get to the stage where you can give the bank what they want. I know our damaged TC3 property is a long, long way from having the above.

[DazRaz]

Wow, that is way harsher than for me. They know my foundation is buggered. They know I am insured. Didn't need to show them builders reports or anything like that. My LVR with the purchase is at 54% so I think that made a big difference for me.

[ream]

Hmmm. Well I know they were being harsh with us because we didn't have all our business with them, but at the time they sent me that they were only thinking they were going to <50% lol. It did look like a standard clause that our RM had copied from somewhere else, so I guess your relationship with them counted for a lot