On the up and up

If you can't get a bach then reach for the sky, an apartment may be just as good.
 
The new Kiwi bach is an apartment. That's the reality for many people looking for a foot in the door of coastal paradise. Developers have cottoned onto this, buying up old baches on prime land, pulling them down and replacing them with three, five or even 10 apartments.

A search of TradeMe finds a surprising number of coastal apartments in a wide variety of locations – such as Kaitaia, Raglan (motel unit), Whitianga, Papamoa, Ohope, Taupo, and Gisborne in the North Island.

In the South Island, Nelson Bays, Queenstown, and Wanaka are the most popular for apartments.

 Prices range from just over $100,000, to several million dollars for a highly desirable apartment.

In Tauranga and Mt Maunganui prices often exceed $1m with properties in the $2-$3m bracket not uncommon. The most expensive ever apartment in the area, in the Tsunami Apartments building was sold to a US-based Kiwi for $3.2m.

In such a hot market it's often difficult to fund such a purchase. Increasingly families club together, or market the property for rent in order to cover the mortgage, body corporate fees (if an apartment), rates and any other maintenance.

Tauranga-based mortgage broker Jonathan O'Connor of Realty Mortgages says: "Your average New Zealander can no longer afford a bach. If there is something in the range they are considering, when comparing it to an apartment, the difference can be a run down, old dwelling, several blocks back from the beach that requires high maintenance and receives a low rent versus a new and modern, fully furnished, secure and low-maintenance dwelling, with water views or in a prime position, sometime with facilities such as a gym, pool and tennis court that can, during the holiday season, command a very high rent. This coupled with the convenience of lock and go is particularly appealing to those from the cities."

Increasingly apartments are finding their way into the nightly rental market with owners looking to re-coup some of their costs says Leslie Preston Leslie Preston, general manager of Bachcare, an upmarket bach management company, who has seen a surge in apartment owners signing up for her company's services.

But not just any apartment will do. Preston recommends that buyers think carefully about the size of the apartment before buying. Those that sleep six people or more are much easier to rent than smaller apartments that developers favour.

This is also important when looking for a mortgage, says Jonathan O'Connor, mortgage broker at Realty Mortgages in Tauranga. Lenders are unwilling to lend on properties that have a floor area of less than 40 square metres, excluding car parks and balconies.

Other issues you need to consider when buying an apartment are the construction materials. Tenants don't like to hear what other apartment dwellers are up to and coastal properties need corrosion-resistant features in the roofing, joinery and structural connectors.

Buyers should beware of buying apartments "off the plan". That is before they've been built. In a rising market putting a deposit down now and paying the balance when the block has been built has been profitable for many buyers. However should the market turn in between your initial deposit and balance, and the property drop in value you might not be able to find a large enough mortgage to fund the balance.

When it comes to funding your purchase of an existing apartment or off the plan, typical apartment buyers, says O'Connor, buyers leverage the equity in their own homes to fund the deposit. 

Apartments tend to be more difficult to fund because lenders have had a downer on them. But O'Connor believes that bank employees on the ground in coastal areas such as Mt Maunganui and Papamoa are becoming more accepting of apartments. "(The market growth) has created a demand for lenders to introduce clear and concise criteria on apartment lending. In many instances now it can be just as easy to obtain lending on an apartment, dependant on its nature, as it is for a stand-alone home."

Lenders appreciate that the type of person buying a holiday apartment tends to be better heeled than someone buying an inner city one, says O'Connor.

"Coastal apartments are generally of a high specification and a larger floor area also. Therefore the lenders are often very comfortable with the security taken and the servicing ability of the owner."

Even so, the typical loan to value ratios (LVRs) offered by banks on coastal apartments is 80 per cent, says O'Connor, although he knows of one lender who will lend 95 per cent in certain circumstances.

Many desirable coastal apartments are let as "serviced apartments" which are let furnished through managing agents. From a buyer's point of view this can make life very easy. However there are some fish-hooks that can catch the unwary. The first problem, says O'Connor, is that lenders usually won't take into account income generated from a serviced apartment when deciding if you have sufficient income to pay the mortgage. "For apartments that are serviced, or studios, the lenders are reluctant to lend high LVRs. Several will only lend 50-60 per cent."

You can also come a cropper with the taxman when you sell if you're not careful, says Mark Withers, specialist property accountant with Withers Tsang Accountants. "Resort style apartments are managed professionally on short term letting arrangements, much like hotels and motels, due to the commercial nature of these arrangements many investors must consider the GST implications of their purchase," says Withers.

"Usually the developer of the property will be GST registered which means GST must be charged on the sale of the unit. The purchaser will only be able to claim the GST back if they opt to register themselves.

"Potential problems for owners who have purchased properties and registered for GST can develop later if they wish to stop renting the property out and are therefore ceasing their taxable activity. Under these circumstances the owner must deregister for GST and repay to IRD the GST based on the market value of the property at the time."