For many of us the idea of owning a beach or lakeside holiday home is the epitome of living the Kiwi dream, but often one of the biggest hurdles to get there is the ability to finance the property comfortably. Some opt for co-ownership with a friend or family member to help ease the pressure, while others choose to rent out their property for short-term stays.

GM of Bayleys Property Management Southern Lakes Richard Hoskin and Chelsea Hall, Business Manager at Bayleys holiday home rental agency Be Our Guest say if renting is part of the plan, it’s good to start thinking about it early and if you can, before you even purchase the property.

“You must think about location and geographic demand. Where is your holiday home going to be, and will it generate interest all year round, or is it just seasonal?” says Hoskin.

“You also need to ask yourself if you want to use it too, and when. Sometimes we get owners who want to use it in the peak holiday periods themselves, which can be tricky. We can still generate a certain level of income for them, but typically we want the owner to make the house available all year round to maximise their returns.”

With that in mind Hoskin says it pays to consider all of that before even entering the market.

“People also need to decide where they fit in the market. Is it mid-range or luxury and does the region and location provide demand for that?”

“There’s not much point in having a high-end property in an area that guests aren’t likely to stay in.”

HOW MUCH SHOULD I CHARGE?

Hall says when setting a rate for your holiday home it’s important to work out your place in the market and ensure that the price reflects the quality, location and likely demand for the home.

“It's easy to just chuck a price on a home and say, yep, this is what it's worth. But you may not see bookings come through which is why you really need to be keeping an eye on the market and the demand and adjust accordingly across different seasons.”

Hoskin says the returns can be really strong at the luxury end of the market, but the costs are also higher.

“But if you get someone staying for a week at $2,000 plus a night versus a week at $400 a night, there's some obvious benefits there.”

The pair agree that as part of the purchase process buyers should speak to an expert about what they could be charging.

“We undertake free, no obligation, appraisals, and give buyers an idea and understanding about those rates throughout the seasons. On top of that we also look at estimated running costs and estimated net income as well.”

“We put that all together for them to consider whether it's worth it.”

WHAT ABOUT TAX?

So you’ve bought the bach, and you’ve set the rate - what about your legal obligations? Chelsea Hall says when it comes to holiday home rentals, owners should treat the property like it’s a business.

“That means you must pay tax on the income generated from your holiday home.”

To work out what kind of tax you pay depends on your private use and the number of days your holiday home was unused, which defines whether you fall under the ‘mixed-use asset category’. If the mixed-use asset rules apply, they set out what income from the holiday home is taxable, and what proportion of expenses you can deduct.

When mixed-use asset rules apply:

• If your holiday home was used to earn rental income and was also used by you or an associated person like a family member.
• If your holiday home was unused for 62 days or more.

When mixed-use asset rules don’t apply:

• If your holiday home earned you rental income and was not used by you or an associated person.
• If your holiday home was unused for less than 62 days.

You have to determine if your holiday home is a mixed-use asset each income year as this can change from year to year, and when it comes to deducting your expenses it’s important to distinguish whether they were for private use, income-earning use or both.

Opting out: If you meet certain criteria you may choose to opt out of the mixed-use asset rules. If you opt out, the rental activity doesn’t need to be included in your income tax return. You don’t return any of your income, and you can’t claim any of your expenses for the holiday home.

You can opt out if:

• Your gross income for the year from the income-earning use of your mixed-use holiday home is under $4,000.
• OR your holiday home is loss-making, and your gross income from income-earning use of the holiday home is less than 2% of the value of the holiday home.

You can access a full guide to tax and mixed-use assets on the IRD website.

WHAT ABOUT GST?

Renting out short-stay accommodation is also a taxable activity for GST.

If you’re marketing your property on your own website, you’ll only have to register and file if your turnover from your holiday home is over $60,000 for the year.

However, since April last year, if you’re marketing your holiday home through an online platform operated by someone else, you’ll have to pay GST regardless of whether you’re registered or not. But the operator of the platform is the one who is responsible for charging the GST and paying it to Inland Revenue.

“So, if you're not registered the rate is 6.5% and if you are registered then the rate is 15%. Most people aren't aware of that change” says Hall.

You can access a full guide to GST and short-term rentals on the IRD website.

Ultimately when it comes to all things tax and GST, Hall and Hoskin say the best way to get it right is by seeking advice from a registered accountant.

WILL SHORT-TERM RENTING AFFECT MY INSURANCE?

Hall says good insurance is non-negotiable for a rental property, but it’s important that owners check their policy because most standard agreements don’t cover short-term holiday home management.

“There are specialised policies for that area, and owners really need to be looking into getting the most comprehensive one.”

“With a property registered for GST, typically they are more likely to come under a commercial taxable entity insurance policy, which are noticeably more expensive than your typical house and contents policy.”

That’s why Hall says it’s also important to consider this ongoing expense when choosing the right holiday home to buy.

ARE THERE OTHER THINGS TO CONSIDER?

Hall says it’s also important to consider any difference in local or regional council rules when it comes to short-term rentals.

For example, Queenstown-Lakes District where Hall is based requires providers of visitor accommodation to have consent in place from the council.

“Most areas are zoned to be approved for 90 day visitor accommodation consents, and from there you can apply for more, but it does come at an extra cost.”

Other things to think about could also be an increase to your rates.

HOW DO I MANAGE THE DAY TO DAY?

Hall says having the right systems in place to manage bookings is crucial.

“When you're advertising your home, you're typically advertising on multiple channels and it's important to be able to manage those and streamline the bookings to prevent issues like double bookings.”

Hall says agencies like Be Our Guest usually have the software to do that but are also hands on in the day to day management of things like cancellations, maintenance and last minute bookings.

It’s also important to note that holiday rentals are covered by consumer law rather than the act that relates to long-term tenancies, which means it's important that you have a rental agreement in place to cover both owner and the renter.

“Be Our Guest has a rental agreement with the owner, but we also have one with the guest as well.”

“So, when a guest makes a reservation, we send them a rental agreement which states our T's and C's, pre authorisations, damage deposits, check- in and check-out as well as expectations in terms of noise and how they are to leave the property.”

Hall says setting the expectations out early on is really important.

“If you don’t have the ability to make a rental agreement you can always message the guest ahead of their stay.”

Hiring an agency like Be Our Guest is a great way to stay on top of everything, but Hall says that’s also another cost you should consider when purchasing a holiday home.

WHAT IF SOMETHING GOES WRONG?

Hall says most holiday home listing websites will have a disputes team that can assist with mediation.

“So, it's really important that you document everything with photos and detailed notes.”

“It's also really important to try and take a damage deposit from the guests before they arrive, so that if there are any issues, then you have that money to cover the cost of any damage.”

Hall says using an agency like Be Our Guest means a lot of screening and filtering of guests is done beforehand to hopefully avoid any issues down the track.

“That includes things like our minimum age requirement.”

Ultimately a holiday home can be a rewarding and worthy investment, but it’s important to get it right when it comes to the management and your legal obligations, so you don’t get caught out down the track.