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Holiday Home Renter

Can you make the most of equity in your own home with a holiday home that doubles as a rental?

By: Property Investor Team

31 March 2015


Looking At Raglan Bach

I’m looking at my first property investment but am very cautious. I have a mortgage-free house but no cash. I’m 55 with one income of around $70,000. I’m considering a bach in Raglan as both a long-term investment and also for my own use, although it would need to be rented or partially rented.


Firstly, you need to take some tax advice to understand the implications of purchasing a holiday home and how the changes to the tax rules in regards to this a couple of years back may affect you. Secondly, you need to have a think about what you want in an investment and what returns you want to achieve and if a bach will give you this result. Another investment may be a better fit. If you do proceed with a purchase, rather than offering your current home and the purchase to one lender as security, look to raise a 20% deposit against your existing home with the remaining 80% raised through another lender. This way your two properties won’t be cross secured. - Kris Pedersen


Massive Damage On Property Manager’s Watch

I live and work overseas and have a furnished apartment in New Zealand which was managed by a property manager. The property manager advised me of complaints from neighbours about smells. On inspection, the property manager discovered the place completely trashed with stained carpet, ruined furniture and appliances and filth and damage everywhere. The tenant was given notice but stopped paying rent and was evicted. Repairs are estimated at $15,000. The property was under a property manager for four years. It was the same tenant with none of this reported to me. Is the manager liable for damages?


You haven’t said whether the eviction was carried out following an order of the Tenancy Tribunal. I’ll assume you did receive an order. There are two issues here. Firstly, the tenant is responsible for cleaning and/or repairs to damage caused during the tenancy. To that end, the tenant is responsible for any damage to furniture, carpet, appliances caused by the tenant or anyone the tenant allows on the property. The tenant is also responsible for any rent arrears the Tenancy Tribunal establishes. District court collections processes are available for you to follow up on the order and collect the debt.

The second issue you raise is whether the property manager is liable for damages. As your agent, a property manager must act in your interests. He (or she) must also carry out his tasks diligently to ensure your interests are protected. However, that depends to a large degree on the agreement you have with your property manager.

You can make a claim against your property manager only if your property manager has failed in his duty to you and if you have suffered a loss as a result of that failure. For example, if the property manager failed to carry out inspections that were promised, and as a result failed to notice damage over a long period, then you may well have a claim against him. If, however, the required inspections were carried out but all the damage occurred in a short period after the most recent inspection and just prior to the tenant’s departure, then it may be hard to establish a failure on the part of the property manager. You should first look at the facts. Given that the tenant appears to have caused the damage, when and over what period of time did it occur? Should the property manager have noticed the condition of the house? If so, did he take action to bring the tenant to task? Did he do so promptly? Did he keep you informed about what was happening? Based on these questions you will know whether the property manager was in a position to take action to prevent any of the damage, and whether he took the necessary action. Your decision will flow from these answers.~ Bernard Parker


Tax Deductibility From Us

I currently live in the US and rent out a property in Wellington. The property does not make any money and I have to top up the mortgage every month. Recently, the house needed some expensive work done – new water heater, painting and so on. I understand I cannot claim the expenses back as there is no income to claim it against, but can I claim back the GST? If so, how would I go about this? Should I set the property up in a trust?


Because the property is deriving income in New Zealand, you will still be required to file a tax return in New Zealand even if the result is a loss from the rental property. The costs on the property are deductible if they are revenue account maintenance costs rather than capital expenditure on the property. Residential property rental is an exempt activity for GST so there is no ability to register and claim GST input costs. The GST inclusive cost is the expense deducted for income tax purposes. If losses are claimed they will accumulate and be available to offset any profits in future from the New Zealand-derived income. You should also take tax advice in the US to determine what implications exist in the US, which is likely to look to tax your worldwide income if you are a US citizen or green card holder. `~ Mark Withers


Bond Return On Fixed- Term Breach?

If a tenant terminates a tenancy before the fixed term is finished, then who gets the balance of the bond? For example, the bond was lodged for $2,000 with total property costs of $250 to be deducted. Who gets the remaining $1,750?


The answer will depend on the circumstances surrounding how the tenancy has ended. Under the Residential Tenancies Act 1986 (the Act), a fixed-term tenancy cannot be ended by either party giving notice to terminate the contract before the agreed end date. Either party can approach the other to see if either is agreeable to ending the tenancy agreement by mutual consent.

Any agreement should be in writing, clearly stating the terms associated with the tenancy ending earlier. Another option that allows a tenant to exit a fixed-term tenancy is a process called “assignment”. Assignment is where a tenant wants to leave and have someone else take over their interest in the tenancy. Once a suitable replacement for the tenant has been found, the obligations of the departing tenant(s) continue until the day the assignment takes effect. This includes responsibility for paying the rent as well as anything that happens up until the day the new tenant takes over, but not after that date. A landlord who agrees to an assignment can recover the actual and reasonable costs associated with the assignment of the agreement from the tenant such as advertising costs and credit check fees. The ministry has prepared an information sheet for parties who want to end their fixed term tenancy before the agreed end date. You can read this information at http://www. dbh.govt.nz/tenancy-ending-fixed-terminfo. ~ Alan Bruce


Apartment “Lemon”

My wife and I own an apartment in central Auckland and would like to know whether we should sell now that the market is rising or hold on for the longer term. Being naive first time investors, we paid too much for a three-bedroom apartment in Parnell about eight years ago just before the GFC. We’ve managed to hang on to it, have always had good tenants and we’ve employed a property manager who’s just increased the rental and the value of the property has just come back to what we paid for it. The cost of running it is quite high as it’s on leasehold land and so has high body corporate fees and we’re fully mortgaged for it so we run it at a loss. We’ve talked to our accountant who suggested that if we sold now we’d be slightly better off cashflow wise. So the million-dollar question is, should we hang on for the longer term, given that we’ve come this far, or should we sell and move on?


Growing up in a family with three older sisters I’ve witnessed a lot of intelligent, agony aunt-type advice, which parties (myself included) have chosen to accept or not. So take this advice with a grain of salt. Based on the information provided, you’ve bought a lemon. An unripe, dehydrated disaster.

Let’s not hide from that. To be fair it was the market’s fault. Eight years ago we all went a little crazy.It will never happen again, right? If you can escape with your bait intact, as you’ve indicated, then do it now.

Like right now. Like today. If you choose to continue to run the market gauntlet then it’s absolutely critical you match the pace of your per-week rent increases with the (unavoidable) rate of the ground rent.

Hire a professional property manager to avoid the awkwardness. There are many sound reasons to purchase a leasehold property. What you have described isn’t one of them. Sell now! - Krister Samuel


Claiming Damage For Short-Term Rental

My tenant’s child has accidentally broken a large window and they have asked me to repair it through insurance. I don’t have landlord insurance and my property is not listed with my insurance company as a rental because the tenants are only in there for a short period. Do I pay for the broken window or do they? Or can I claim on my standard house insurance?

“Assignment is where a tenant wants to leave and have someone else take over their interest in the tenancy ” - Alan Bruce


Your question raises a couple of matters. Firstly, there has been a recent case under the Property Law Act (Holler vs Osaki) which prevents a landlord from seeking recovery of costs from their tenant where he/she has accidentally damaged the landlord’s property. This means you may not be able to claim costs for the broken window back from your tenant. Secondly, insurers always need to know the occupancy type as this can increase the chance of damage to the home, so will affect the premium they charge and/or the excess. For example, rentals/holiday homes are generally perceived as a higher risk to insurers than owner-occupied homes. Therefore they attract higher premiums and excesses. Since you haven’t declared to your insurer that your home is rented – albeit for a short term – they may decline your claim for non-disclosure of a material fact. However, given it’s a short-term rental (and assuming it’s normally owner-occupied and not rented), hopefully they may look kindly on your claim or apply the terms they would have if they had known that the property was tenanted. - Myles Noble


Mortgagee Sale Risks

I am looking to buy a property on mortgagee auction. I’ve been told by the real estate agent that there is a risk of chattels being removed. Has there ever been a case of windows being removed and is it legal for the former owner to do so? I’d also appreciate any advice with regards to buying properties under mortgagee auctions.


Mortgagee sales happen when the vendor is having or had a set of unfortunate circumstances financially and is unable to make payments on his property, thereby defaulting on his mortgage to the bank. If the place is rented by a tenant other than the vendor, there is a lesser chance of damages or removal of chattels. However, carry out your due diligence and check the property and tenants. The risk is in chattels, fittings and fixtures being removed, or malicious damage. Even fire can break out if the vendor becomes emotionally unstable and is being forced out of his home through the auction process (he/she may even refuse to leave the house until evicted) and there is no warranty by the bank or vendor to ensure vacant possession. An example of this could be where there may have been a marriage or a family break up, payments are not made because of financial difficulty through reduced incomes and the bank, after several unsuccessful negotiations, forces a mortgagee sale. The vendor who still owns his house may turn and remove everything he can, or destroy, and even burn his own home before the settlement day. You, as the new prospective owner, will have probably accepted the risk at the auction sale where all standard vendor warranties are removed and you may have difficulty insuring a place that isn’t yours until the settlement date. Your bank may refuse to advance you the funds to settle, or if you fail to settle, you may lose your deposit and still be required to settle any shortfalls. Probably the best price to pay for a property would be for the land value only. Any higher amount should be treated with caution. Whatever you do, take as much legal advice as you can and remember “caveat emptor” – take caution, let the buyer beware! - Ron Hoy Fong


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