Holiday Rental or Fixed Tenants?

[kpie]

Hi All,

A newbie here.I have recently discovered this forum and think its fantastic,so thank you to everyone for taking the time to post & share advice.

My hubby & I have recently moved back to NZ from Australia with $100,000 in savings & are looking to step foot on the property investing ladder.

We are deliberating 2 options.
Option 1
Invest the whole $100,000 into a $700,000-$800,000 house & and turning it into a holiday rental.(my friend manages holiday rentals in the area) and we are estimating a 70% occupancy at $500 per night.
Based on my calculations we would stand to gain $60,000 per annum or in the case of a 50% occupancy $28,750,which we would put back into the mortage repayments.

Option 2
Finding 1 or 2 cheaper cash flow postive properties and renting them out.

We currently live rent free and have no debt,although only have one income at the moment as our 1st baby is due soon.

Any advice would be much appreciated,should we go all out or start small?

Thanks

[Rosco]

Hi kpie,

Where does the 70% occupancy come from? I've never seen a holiday home rental get $127,750 a year in rent (365*$500*70%).

Generally these have good occupancy in Dec, Jan and Feb, but then poor over the rest of the year. A lot of holiday homes struggle to get $20,000 in rent for the year.

This would be my major concern, as I don't believe you are working on realistic figures, otherwise everyone would have a holiday home for a rental!

Also make sure you are aware of the personal use rules for holiday homes, as these changed over a year ago, and reduce the tax deductions if you use the house as a rental and personal use (mixed use).

Ross

[BigDreamer]

I'd love to know where this holiday rental house ($500 per night) would be. Sounds far too good to be true.

In saying that, I would go with option 2.

[Ahar]

Wow..... 70% occupancy.....sounds to good to be true

And of course I don't believe it for a second....have friends with holiday homes and they only manage to rent it out over summer months and get nowhere near $500 per night

On what basis does your friend predict the occupancy and rent levels..... do they have actual figures to support this and the level of rent or is it just pie in the sky/wishful thinking

And is this friend also going to sell you a property....Wow again...a one stop shop...... how convenient

You know what they say....if it sounds too good to be true, it usually is

By the way, Rosco is an accountant who I'm sure has clients with holiday homes

In other words, the man knows his stuff

Now if you think we are all a bunch of old nasty, negative so and so's who are down on your brilliant scheme simply because we can't find such wonderful opportunities .....believe me when I say, that most of us here are taking such a stance because we would hate to encourage you into a dead end position

That really would be nasty

[PTILoveYou]

Option 2.

Holiday homes are just too risky and speculative.

Besides, if you really want a vacation, just rent a holiday home or motel for a few days.

[kpie]

wow thanks for getting back to me so quickly everyone!
(No I don't think you are a bunch of nasty negative so & so's )

The location is Queenstown and my best friend is a hotel manager there with a holiday lettings management business on the side.
She has 5 houses she manages at present and so we are basing the information off of this.

Queenstown is busy mostly year round with a quiet period in may/june.The houses she looks after are mostly booked 6 months in advance and with an average 70% occupancy rate.

Houses in the $700--$800,000 mark in queenstown seem as rare as hens teeth though and agents have told me clients buy before they go on the market unsighted so It may be hard work trying to find one.....

-Ross, I wasnt aware of the new personal use rules for holiday homes will have to check them out.Thanks

My question for those of you who said option 2,would you try and find two cash flow positve properties with a 50,000 deposit on each or go for one and put down the whole $100,000?

Thanks

[PTILoveYou]

For option 2, yes always try find cashflow positive properties. You don't want to be on a single income with new kids and then having to top up the rental as well. Hence why I recommend option 2 also in case you have a dry spell down in Queenstown...

As for how many, it depends the price range you are buying in, and where the rental would be. These days you need 20% deposit...

[BigDreamer]

kpie, I would look at yield. I don't care if a house was $250k ($50k deposit) or $500k ($100k deposit) as long as the yield is good then I am happy.

Any specific cities / areas you are looking at investing in?

[kpie]

Any specific cities / areas you are looking at investing in?

Big Dreamer- I am in the south island so probably down here,going to get a couple of the NZ property mags tomorrow otherwise haven't looked into locations at the moment.

[PTILoveYou]

Any specific cities / areas you are looking at investing in?

Big Dreamer- I am in the south island so probably down here,going to get a couple of the NZ property mags tommorrow otherwise havn't looked into locations at the moment.

If you live in a major town or city like Christchurch/Dunedin I would recommend invest there.

Smaller towns have high cashflow, but capital growth will be limited.

Rule of Thumb, invest in towns that have positive population (and jobs) growth.

[Ahar]

Just a thought re the Queenstown option.

What are the management costs? They can be quite horrendous....lots of little hidden extras

At least that's what I discovered when enquiring about Gold Coast apartments.....

Was trying to get them down in price for a couple of night's stay....turns out the management and cleaning between tenants was in the order of $200 a time....totally outrageous expense....you can see who makes all the money and it's not the LL so not a lot of wiggle room for a LL to negotiate anything

Be very certain as to ALL the costs associated with a holiday let....especially if you buy into an apartment complex....and even more so if you buy into a hotel complex....don't think too many people make money off of them

And also, you will also have to furnish the place....and for $500/night the standards would be quite high

[Orpheus1]

Kpie,

I sent you a Personal message.

O

[kpie]

Just a thought re the Queenstown option.

What are the management costs? They can be quite horrendous....lots of little hidden extras

Ahar- management is 10% thats mates rates,the local estate agents are known to charge up to 30%,this doesn't include advertising.
Cleaning is $100 per clean.
Yes it would have to be fully furnished as a holiday rental but I have brought back some new furniture with me from Australia with this in mind.

[Ahar]

Mmmmm mates rates.... you know I really don't like the sound of that

Sorry, but I dislike this deal even more now that we know more about it....there are just far too many variables.....this means the business is much riskier than you might think.

For starters, is this your mates business or are they just an employee?

If it is their business, just how long is your mate prepared to offer such a steep discount?

What happens if their business gets into trouble.....and with them offering such steep discounts they won't be making anything out of your property so they will probably be in trouble sooner rather than later....did you say they've only got five properties to manage? Not much to live on!

Property is a very long term investment......surely your mate isn't going to subsidise you forever.... it's not realistic to expect that. I should think your commission rate will increase quite quickly.

So have you worked out your figures on the 30% commission figure? Whilst you're doing that, factor in an increase in your expenses by say 10%pa AND a decrease in rent by a similar figure. How do things look now? Still keen to go ahead?

Now increase interest rates by say, a couple of percent ....how are things looking?

Finally, increase the vacancy rate.... really bad snowfall happens quite frequently you know and savages the Queenstown economy.....make the vacancy rate say 50%...bet the figures are starting to look a bit sick

Remember, when things go bad, things get really ugly

IMHO I think this is a really risky venture, one that could cripple you financially

But then again I don't really like risk

[Orpheus1]

Just a thought re the Queenstown option.

What are the management costs? They can be quite horrendous....lots of little hidden extras

Ahar- management is 10% thats mates rates,the local estate agents are known to charge up to 30%,this doesn't include advertising.
Cleaning is $100 per clean.
Yes it would have to be fully furnished as a holiday rental but I have brought back some new furniture with me from Australia with this in mind.

Does the 10% commission cover the cleaning?
You say cleaning is 100$ how many bedrooms and bathrooms?
Landscapingincluded? If not an apartment etc
Does your friend charge a fee to organise and presumably meet onsite to give access to tradesmen?
Does you PM have 5M public liability insurance?
Do you know any tradesman going in your home needs minimum 1M public liability insurance as part of the PM 5m policy?
what about callouts for
1.heating
2. A/V issues
3.internet problems
4. locked out
Do they charge extra for callouts after hours and on weekends or is this included in the 10%.
But the most important thing is who meets and greets and vets the tenants? Or is it just a lockbox?

Rates are 25% higher for mixed use vs owner occupier so you are looking at over 3500$ on an 800k property.

You are swimming with sharks!

First thing is forget what your friend is telling you! As for an 800k investment one mouse fart of a problem and your friendship and investment career is over.
Call 3 other PM's and ask what there charges are and whats included and you will soon figure out your friend is full of shit or their little PM hobby is about to be short lived.

I own 3 properties in QT and have been short terming and long terming for 4 years.

O