It’s a time of year when Kiwis traditionally head to the beaches and lakes to enjoy some rest and recreation. The Kiwi bach [as in “bachelor pad”] culture is never stronger than over our Christmas and New Year holidays. Many people will no doubt be contemplating the goal of acquiring and enjoying a family bach.
Achieving the goal of a bach is something that many people have discounted as being unattainable, however in recent years the financial crisis has resulted in falling property values in many of our traditional holiday destinations such as Northland, for example.
One of the simplest strategies available to aid in the affordability of a bach is to consider the possibility of making it available for rent. If one considers that deriving as little as NZD 15,000 [NZD 1.00 = USD 0.83] a year from a bach at a mortgage interest rate of 6.5 per cent, this income could service the interest on a debt of approximately NZD 230,000 and in so doing provides a not insubstantial contribution to the cost of ownership.
There are also income tax consequences for those considering renting their bach to assist with the costs of ownership. For the 2014 income tax year the [New Zealand] Government has introduced new Mixed-use Asset rules. These rules are designed to restrict the deductions that had previously been available to taxpayers who have mixed-use assets like baches, charter boats and private airplanes available to produce rental income for part of the time but at other times were reserved for personal use.
The introduction of the new law has created some new complexities for bach owners, but at the same time those who are genuine about deriving a rental income from their bach still have opportunities to deduct expenditure. Expenditure that is specifically in relation to the income earning process like advertising and marketing will be directly deductible. General costs like rates, interest and insurance must now be apportioned relative to the use of the bach. For example, if the bach is rented for fifty nights and used privately for fifty nights, fifty per cent of the overall deductions will be claimable against the rental income achieved.
There are also new restrictions on the counting of rents from associated persons and rents from friends and family where the nightly rent is reduced by twenty per cent or more.
Another feature of the new rules is that if a loss is generated, this tax loss will only be able to be offset against a taxpayer’s other income if the gross rent from the bach exceeds two per cent of the government valuation of the property. Readers contemplating the tax implications of investing in a rented bach should seek specific tax advice on these new rules from their tax adviser.
From a marketing perspective, marketing baches is all about marketing the holiday, not the home. Very powerful market initiatives include organizing a referral network of other people in your area who are also seeking to rent out their baches. Another tip for those seeking to maximize their rent is to make the bach pet-friendly.
If income is the goal it will also be important to select a location that is not too far from a main center. Realistically, people are reluctant to drive more than three hours for a weekend stay.
As you contemplate your holidays, spare some time to have a look in your local holiday destination’s real estate window. Who knows, you just may be tempted to look at a bach that could not only provide wonderful family pleasure but could be an excellent investment.