Bookabach and lending

[sidinz]

A few people have suggested/recommended that I set my Rotorua property up as a book a bach, as it's right across the road from the Redwoods and about three minutes' walk from the thermal village.

However, at some stage in the not-too-distant future I will need to borrow against this property and its income will be scrutinized. What sort of rental history will the banks need to see before they will count it? Six months? 12? 24?

[Anthonyacat]

Technically, the income of the property should be entirely independent from your ability to borrow against it. What should matter is your overall income.

If you need this to be included in your overall income for servicing, I understand short term rentals are considered by banks to be a 'business' - as opposed to residential and commercial rentals which are 'investments'. Banks usually want two years of business income, but this can vary a lot. My current mortgage process hasn't required any proof of my accounting firm income at all.

[Nick G]

Ask your bank :-)

[sidinz]

Ask your bank :-)

Well yeah, I could. But banks tend to have different criteria.

If you need this to be included in your overall income for servicing, I understand short term rentals are considered by banks to be a 'business' - as opposed to residential

Sigh. As I am currently a small player I would definitely need the rent to be included for overall servicing. Being classed differently would certainly complicate matters as the top-up lending would be to fund a relocatable 2nd dwelling onto part of the section. So it would end up being a mixed use property with both dwellings being in different categories. Yuck.

[Wellington Broker]

What do you mean by different categories? It's pretty common to use a rental appraisal to verify income, especially if you were only using it as a book-a-bach over the Summer peak

[sidinz]

What do you mean by different categories?

One dwelling residential rental, one dwelling a business, as per Anthony's comment above.

[Wellington Broker]

Oh right. From a lending perspective the security is only considered mixed-use if it's commercially zoned. Two dwellings on one title shouldn't cause too many issues.

[Nick G]

I wonder how the management of that would work? If I was a long term tenant I probably wouldn't be excited about being in the back yard of a book-a-bach place.

[Anthonyacat]

So it would end up being a mixed use property with both dwellings being in different categories.

As far as the banks go, there's nothing of different categories for the loan in this case. As WB said categories for loans refer to commercial/residential (or bridging/long term) rather than the use of the property. Both properties are residential, and if you've got the income to service the debt there shouldn't be any issue. The problem will be in recognition of your income, because you're running a business. Like any self employed businessman, you have a higher evidential requirement. But do ask your bank - they may not need much.

Really silly in my opinion. If an entrepreneur's business fails they've got the skills to find a new way to earn money. If someone on a salary is 'let go', most will be unemployed for months. If they've been in a 'nice secure job' with no skills progression or training for a decade, they may be almost unemployable. But the banks will lend to them no problem!

The really dumb thing? Anyone I were to employ in my accounting firm has a 'secure PAYE job' from the bank's perspective - but I don't? If my business starts to go down, their job will be gone before my income collapses.

[sidinz]

I wonder how the management of that would work? If I was a long term tenant I probably wouldn't be excited about being in the back yard of a book-a-bach place.

They wouldn't be. The section is big enough and the layout such that it would be like being neighbours. Beside each other with a standard fence between.

[sidinz]

The really dumb thing? Anyone I were to employ in my accounting firm has a 'secure PAYE job' from the bank's perspective - but I don't? If my business starts to go down, their job will be gone before my income collapses.

Yep, often no logic when it comes to rule books.