The economics of baches
Bach ownership might be part of the Kiwi dream, but it’s not cheap, and the economics behind it are multi-faceted, writes Miriam Bell.
When Covid first hit, Karen McCardle had to rent her family’s Waihı¯ bach out to help with costs, and keeping it as a short-term rental still lightens the financial load.
McCardle, who grew up in Waihı¯, had always wanted a bach in her old hometown, and jumped at the chance to buy one near the beach eight years ago.
The family used it regularly, but she and her partner work in the tourism industry, so when Covid closed the borders it was essential for them to rent it out to generate some income.
They often use the bach in the holidays, but it makes sense for it to be up for short-term rent, she says.
‘‘It generates enough income to cover the expenses, rates, insurances, and repairs, but as we don’t rent it in the peak seasons it does not generate as much as it could if we did.’’
They use a full service booking system, and are not involved in the marketing and management of it, but have to book well in advance when they want to use it, she says.
Renting out the family bach, as McCardle does, may not be for everyone, but for those looking to boost their income and lighten the financial load, it’s an attractive proposition.
It’s not as simple as tidying the bach up, listing it on a shortterm rental platform, such as Bachcare or Airbnb, and sitting back to collect the money.
There are many considerations, including costs, taxes and personal access, involved, and they may outweigh the potential income. That means the economics involved with bach ownership need to be considered carefully. Here are three.
Costs to buy a bach
For those looking to buy, or sell, a bach, price is an important part of the equation.
Traditionally, the basic Kiwi bach by the sea was affordable for many, but these days buying a property in a popular coastal spot is costly.
It is not possible to run the data for every beach in the country, but CoreLogic has pulled the latest figures for a selection of 15 popular beaches around the country.
The figures are median prices, aggregated up to suburb level from the company’s automated valuation model for individual properties. It is not possible to get reliable price data for beaches in more remote areas.
CoreLogic’s figures show that prices in favoured Kiwi holiday spots, such as Onetangi on Waiheke in Auckland, Raglan in Waikato, Whangamata¯ in Coromandel, and Akaroa in Canterbury, have skyrocketed.
None of the beach suburbs had a median price below $500,000, but the most expensive was Onetangi, which had a median of $2.04 million at the end of October.
Whangamata¯ and Pa¯ uanui in Coromandel, Raglan, Mt Maunganui in Tauranga, and Sumner in Christchurch, all had $1m-plus medians, at $1.43m, $1.58m, $1.15m, $1.47m, and $1.10m respectively.
Kaiti in Gisborne had the lowest median at $509,850, followed by Foxton Beach in Horowhenua with $664,200.
Although price increases in many of these areas have slowed, or dropped off, over the past year, they all had strong growth over the past five- and 10-year periods.
Foxton had the biggest price increase over the past five years, with its median up 102%, while Onetangi had the smallest at 47%.
Over the past 10 years, Mt Maunganui prices increased the most, up 207%, and prices in Wainui in Christchurch moved least but were up 58%.
CoreLogic chief property economist Kelvin Davidson says there does seem to be a tendency for these areas to outperform the national median, although prices at the Christchurch beaches are a bit softer.
Big price increases are not just a waterfront thing, as there are plenty of non-beach suburbs where the median has gone up strongly too, he says.
‘‘The value of an individual bach is not just about being in a good location, or by the beach, it is about the property itself too.
‘‘But the figures do show the desirability of these locations, and while some price falls are likely in the downturn, as these areas are not immune to wider factors affecting the market, they look set to hold their value long term.’’
Rental income
Many baches sit empty for long periods, but listing one as a short-term rental can prevent that while earning extra income for the owner.
Last summer strong domestic tourism numbers led revenue from holiday home rentals to surge to record levels, and this year summer revenue is expected to increase again, according to Bachcare.
Recent figures from the holiday home management company show forward bookings from overseas tourists, strong domestic demand and a shortage of rental accommodation are driving a 25% increase in peak pricing.
Bachcare head of revenue Nick Peirce says holiday bookings are 61% ahead of where they were at this time last year, and projected revenue from them is 70% ahead.
The summer holiday period, from December through to the end of January, is the peak period, so that is when bach owners who want to maximise their income should rent their property out, he says.
‘‘But many don’t, and 50% of our portfolio is not available over the New Year period as the owner is using it, for example.’’
Generally, properties in good waterfront locations with lots of availability, and additional amenities, such as spas and wi-fi, generate the most bookings, and make the most money, he says.
The top earning property of last year was a Mt Maunganui home which had an annual revenue of $81,000, while Bachcare’s top five properties generate gross rental income of $100,000 or more per annum.
Peirce says those properties are high-end, and very basic properties in less desirable, more remote areas would earn less.
On a national basis, the average rental income generated was $18,500 a year, but the average is higher in more desirable areas, such as Mt Maunganui where there is an average of $21,300.
‘‘In many cases, if a property is in a good location, it can generate as much from shortterm rental as it would from a long-term lease.
‘‘We’re talking $400-$500 a night versus $400-$500 a week.’’
Other costs to consider
Any rental income earned does not go into the owner’s pocket in full, as there are costs that need to be paid.
Short-term rental platforms charge different types of service fees. Most Airbnb hosts pay a service fee of 3% of the booking subtotal, but that does not include cleaning or laundry service costs.
Bachcare has a 20% service fee for owners who want their property managed, and it includes support for guests, cleaning, and laundry service. It also has a 15% fee model, where the owner does their own cleaning and linen, or hires someone else to do it for them.
If an owner opts to manage and clean the property themselves, a lot more work than many anticipate is required, and there are costs, such as laundry, which need to be covered.
People can also use professional property managers, which add higher costs, but cut the hassle. Property managers tend to charge 15% to 25% of gross rents, and sometimes add other costs, such as for restocking supplies.
And then there is tax. Property accountant Anthony Appleton-Tattersall says income tax has to be paid, and while there are expenses that can be claimed, the net profit remains taxable.
If total short-term rental income for the year is expected to exceed $60,000 an owner also needs to register for GST, he says.
‘‘This threshold is a lot for a single property, and is excessive for most, but it is important to be aware that it is in total across all ‘taxable activity’ undertaken.’’
‘‘So if a bach owner has a side business bringing in $50,000 (before expenses), it would only take an additional $10,000 to tip the threshold and put both businesses within the GST net.’’
There is also a new tax change that will hit short-term rental owners who are not registered for GST, he says.
‘‘The Government is looking to require Airbnb and other online accommodation providers to hold back GST on bookings and forward this to IRD, and essentially, it will mean a reduction in income of about 6%.
‘‘But it will have no effect on GST-registered owners, who have had to deal with this already.’’
There is another, less tangible issue to consider too, Davidson says. The time an owner can use, and enjoy, their bach will be significantly reduced if it is rented out regularly.
If it is not used often that may not be a problem, and the extra cash flow may be preferable, but for many people it is a negative which will outweigh the income generated, he says.