Holiday Home / Business

[Oopsick]

I was snowboarding a couple of days ago down in a snowy part of country. Being a full-time property investor I could not let any opportunity pass my eyes, so I kept them wide open and came across an interesting investment opportunity (or seems to be). It is a holiday lodge with few flats on a huge site that can be developed further (e.g. more flats placed on the site later on).

I've tried to calculate possible expenses of running such business from a distance:
20% managment fees
electricity bills
gardening
cleaning
rates
insurance

...allowing for all these expences and for 4 months (winter season) 4 day a week occupancy I am breaking even... but there is heaps of potential to get more. I cannot see any downside and this scares me

"What I don't see costs me money" Keith Cunningham

So I just woder whether anybody here has/had any experience with holiday homes/multy-room lodges. What are the prons and cons? What are the things to look out for? What is the risk? Is it easy to get finance?

... anything you think might be relevant please post

[kolzee]

Hi oopsick, sorry no experience to share - just a thought on this....

Being a fulltime investor you probably already realise this but I think you'll find that you'll be looking at commercial finance terms for this.

Possibly this has put off other potential buyers even?? This is no reason not to go ahead though!!

[Gatekeeper]

My family built a holiday home in Ohakune in the early 80's. Can't remember exactly when this happened, maybe late 80's early 90's, but anyway the snow didn't come. It knocked out a lot of businesses in the area. So thats one down side, being just about totally snow dependent.
Summer would be hard going, and you still have outgoings. Close friends had a small 2bedroom place they rented out to skifield workers mostly, some seasons nightly, but it hardly paid it's way, and in the summer that had some real doozies, who often left the place in a mess and unpaid rent to chase. They ended up selling it (after 2 years on the market) and lost out on it all. A bit of a headache. The property manager was a nightmare.
This was in the mid-late 90's.

[SuperDad]

Hi Elena,

First of all, I had a laugh when I read your story. I have recently begun looking at houses in a completely different way. Whereas I used to see colours, materials and street appeal, now all that goes through my head are numbers. Every property is now a potential investment.

I don't have any experience with actually owning a holiday home/investment, but I did recently put an offer in on a property that I intended running in such a fashion. The vendor countersigned at a different price, but by that time I had done some DD and so decided not to continue with the offer process. (I didn't pull out on financial grounds - rather I pulled out because the house and possibly the land it was on was dodgy because of an earthquake in the area.)

The place I was looking at was on the shores of Lake Rotoiti, in Rotorua district. That lake is very popular in summer - so summer was going to provide the main income stream. One thing I needed was an off-season income stream. A bit of market research (conducted by speaking to fellow anglers in the middle of the night while fishing) established the possibility of providing anglers accomodation over winter. There are a huge number of anglers that travel great distances (e.g., from Wellington), who have nowhere to stay there. We typically park up and sleep in the back of our cars - very cold, not to mention uncomfortable!

So the first question is: What are the prospects for a secondary income stream? Is that income stream necessary, or does the investment stack up with only the one income stream?

Second question: Do you know the actual income and costs associated with the property? Best way to find out is to ask for the books on the property, or at least some preliminary figures. The RE agent for the property ought to be able to provide these.

Third question: what are the tax issues associated with running the property. If it is only really available to let over the snow period, will the interest on the loan only be deductible for that period? Will the enterprise attract GST, in the way that a motel does?

Fourth question: How easy will it be to find a manager for the property. I couldn't find anyone to manage the holiday rental in Rotoiti, despite phoning all of the management agencies in Rotorua. Seems holiday property management is not their bag. Relatedly, is the property currently managed by a live-in owner? From my experience with fishing lodges, a lot of the appeal is having someone on-site who is able to respond to demands/answer questions immediately. Also, someone needs to be able to clean rooms for the next guests immediately - between 10am check out and 12pm check-in. In might be difficult to organise such services from a distance. Over the last year I have entertained the thought of buying my favourite fishing lodge in Ngongotaha, Rotorua. But that was just a pipe-dream - unless I actually lived on site, it was not viable. (The lodge has since sold, to a live-in manager.)

Fifth question: what if the snow doesn't come, as Gatekeeper points out. I don't know much about snow, but from what I've heard it has come both early and plentifully this year. But this is not always the case - so the possibility of a guaranteed secondary income stream may well be crucial to the financial viability of the investment.

These are all questions that I would be seeking answers to. However, I believe that you can seek answers to these questions after you have put an offer in, if you have a generous solicitor's approval clause, and a subject to finance clause (in case you can't get lending).

Another thing to try and find out is why the owners are selling. It sounds like the prospect for future development is good. So whay are the owners walking away from that opportunity. Is the business marginal/worse than marginal. It could be that they have put it on the market now exactly because of the goos skiing conditions this year - best time to sell. I would try to find the historical cashflow and outgoings for the property - last 5 years say - to get a good idea of how sustainable the business is long term.

Hopefully this helps. As I said, I have never actually owned a holiday investment, but I've thought about it! Oh, and there was a good article on holiday home investments some time ago in the New Zealand Property Magazine. I remember passing it on to a neighbour, who now runs his farm property as homestay accomodation.

Good luck,

Paul.

[Propoholic]

Hi Elena

In the book 'Property Tax, A NZ Investors Guide', Mark Withers uses his own holiday home at Lake Tarawera as a case study (chapter 24-holiday homes as investments), this gives some pretty valuable information including marketing and management. Have a look at the website he uses to promote and book the property www.stayattarawera.com.

Empower Education recently ran a course on holiday homes as investments, it might be worth contacting them to see if you can get a copy of course notes, CD or DVD?

[Oopsick]

Thank you guys for sharing your thoughts. Good comments and questions... I am going to make an offer and start my sirious research.

It sounds like the prospect for future development is good. So whay are the owners walking away from that opportunity. Is the business marginal/worse than marginal. It could be that they have put it on the market now exactly because of the goos skiing conditions this year - best time to sell. I would try to find the historical cashflow and outgoings for the property - last 5 years say - to get a good idea of how sustainable the business is long term.

This is not run as a business at the moment. As I mentioned the owner is a developer and doesn't want to be a landloard or a lodge businessman. He's done his part and wants to go. I understand his reason for selling.

As for the second stream of income it is true that it will be hard to get one during th summer season, but the outgoings will be covered even if the property stays empty through summer. Of course if I get someone during summer than it means extra $$ in my pocket

Will the enterprise attract GST, in the way that a motel does?

SuperDad, would you mind expanding on that please? What is the difference in GST attraction if you are running a business or a motel/hotel? Do motels have to pay some special taxes related to the business?

Propoholic, thanks for reminding me about the book. It was sitting on my shelve and I forgot all about it... Thanks

Any other ideas please? This really helping me.

[SuperDad]

Hi Elena,

I first learnt about the GST issue a couple of weeks back, thanks to the good folks at Company Solutions. I have just bought an 8-bedroom property in Hamilton, which will be let by the room. There was a possibility that, because it was let by the room, that it might be deemed by the IRD to be a GST-attracting activity. Why? Because the IRD deem certain accomodation arrangements to be commercial in nature, thus attracting GST. From what I know, the downsides to being deemed a GST-attracting activity are the compliance costs and the GST payable on rental income. The upside is that one gets to claim GST on purchase. I think, but am not sure, that rental income also needs to exceed $40K per annum before the activity attracts GST - but I'm really not sure on this.

I'd recommend talking to a good property accountant about this. I used Peter Meads, who works out of the same office as Company Solutions.

There was a discussion on this exact topic a couple of weeks back, on the following thread I started:

http://www.propertytalk.com/forum/showthread.php?t=6987&page=5

The relevant postings are from #40 onwards. Below I have copied perhaps the most relevant of the postings on that thread for your infomation.

To recap: some of you had hinted at the possibility that the property I am looking at might be deemed a commercial deal, from the banks. Jan pointed out that it was the IRD, not the banks, that I should be worried about. I couldn't understand why - the bank had approved the lending as residential, local council had assured me the property was a residential dwelling as opposed to a residential unit (e.g., boarding house), and the insurance company was happy to cover me at standard investment rates.

It's not that simple with the IRD, I was told. My attention was drawn to the following definitions, used by the IRD in the course of determining whether a business is a taxable activity that attracts GST. If the IRD deems the property a boarding house, then is constitues a commercial dwelling, thus attracting GST.


Quote:
Originally Posted by IRD
Commercial dwellings are:

• hotels, motels, inns, hostels, or boarding houses
• camping grounds
• convalescent homes, nursing homes, rest homes, or hospices
• any similar establishment
• any part of a hospital that is a "residential establishment".

However, there is a subset of commercial dwellings, namely residential dwellings, which do not attract GST:


Quote:
Originally Posted by IRD
Residential establishment

A residential establishment is a "commercial dwelling" that specialises in long-term stays, such as school and university hostels, boarding houses, hospices and rest-homes. Of the people staying there, 70% or more must stay, or be expected to stay, for four weeks or more. It also includes hospitals with long-term accommodation, such as geriatric wards.


So the general problem is this: does the property I have under contract constitute a commercial dwelling or a residential establishment? I have heard arguments for both cases. In each case, the arguments were suitably qualified with "We can never be sure how the IRD will view your particular situation until the decide to look at it".

The approach Garth Meliville has suggested to me, and which I am going to adopt, is a risk minimisation strategy. Basically, the benefit of buying the property into a GST registered trading trust, and not being deemed a taxable activity attracting GST, outweighs the risk of buying into a non-GST registered entity and being deemed a GST taxable activity.

So, how does this affect the deal? Well, from a cashflow/yield perspective, it does make a difference. Claiming the GST back on purchase will reduce my borrowings on the deal by some $33K. The increased GST costs eat into the cashflow, such that what was previously $52 cf+ive in year one climbing to $185cf+ in year 10 is now $4cf- in year one, climbing to $96cf+ in year 10. Wow! The profit on sale in year ten drops from $260K to $205K. And I have the compliance issues that come with GST - although I would have had these sooner or later given my plans.

So much to think about.

Of course, the odds are that if I buy the house and apply for GST on purchase, the IRD will turn down the claim on the grounds that the tenants are on standards RTA agreements (1 mth rolling over to periodic), and that more than 70% of the tenants are staying for longer than 28 days. So why am I bothering with the whole GST issue I hear you ask, Because of that strategy of risk minimisation I outlined above. Its a more difficult deal than I first appreciated, but I am learning a lot, thanks to the help of all of the forumites here. And especially on this current issue, I'd like to thank the the generous folks at Company Solutions, who spent a good amount of their time on the phone later this afternoon trying to get me up to speed.

Now for another question: If it is not currently run as a business, are you sure that the property has commercial viability as holiday accomodation. One way to find out the demand for this kind of accomodation is to phone rivals in the area, at this time of the year (i.e., school holidays, peak season) and see whether you can book a room. If they're all booked out, then great news. I've tried to get accomodation at angling lodges over long weekends, and have been told "sorry, we've been booked out 2 months in advance". This kind of comment indicates an undersupply of accomodation.

Another way to test the market is to log on to www.holidayhomes.co.nz and search for accomodation in the area. Phone the owners and explain what you are thinking of doing. I did this once when I was looking at a house on Lake Rotoma, just post Lake Rotoiti. I found owners of these rentals homes were very happy to talk about their experiences, including occupancy rates and rental levels.

Good luck, and please keep us posted on the progress.

Paul.

[Oopsick]

Thank you Paul. I am working with Garth and Peter too I'll keep you updated with the progress

[hort1]

Hi Elena

Be realistic with the expected occupancy when doing your DD
My wife has a independent property management business here in Turangi and has a lot of holiday rental properties on the eastern lake side of lake Taupo.
There is a lot of vacant time with some of them, if you are looking in this area and need to know more about the area just PM me as I will be more than happy to help out if I can.
Cheers
Warwick