Should you rent your investment property through Airbnb?

Should you rent your investment property through Airbnb?

Airbnb has become a popular rental accommodation option for many around the world.  It enables anyone with either a holiday home, existing house, a room or spare space to be rented out for the night or short-term.

 

Airbnb has seen massive growth since it started in 2007 and is valued around $31billion according to Statista.com website.  Their advertising spend in the US alone is $23.5m US (around $36.4m NZ).

 

While Airbnb maybe becoming a power house and a massive competitor to the hotel industry many countries are enforcing restrictions on hosts (those who rent out their space/accommodation) examples are:

 

Paris and Barcelona imposing fines on hosts of up to $25,000 euros

Berlin has faced a massive shortage of housing and passes a law banning short-term rentals, but haven’t received explicit permission from the Berlin Senate, this is still ongoing

New York and San Francisco both city council’s imposing fines for hosts

Denmark – Airbnb will automatically report home owners income to Danish tax authorities

Japan – Airbnb listings must now abide by the same safety rules as hotels

Santa Monica has imposed the heaviest toll of hosts of Airbnb.  The city requires anyone putting a listing on Airbnb in Santa Monica to live on the property during the renters stay, register for a business license and collect a 14% occupancy tax from users that will be payable to the city.

 

Why are cites restricting Airbnb hosts?

There are two main points that most cities around the world are concerned over including Auckland.  First point is depending on the number of nights the accommodation is let out and whether you live in the property classes the property as a business which means many hosts are side-stepping regulations and taxes which are imposed on hotels and registered apartments.

 

The second point cites are restricting hosts using Airbnb, is the lack of accommodation that is available to locals which is becoming a massive problem throughout certain cities. Hence the reason many cities are imposing zoning bans on Airbnb hosts.

 

The potential costs of renting through Airbnb

If we exclude properties like holiday homes, baches and self-rented homes, properties that many owners have turned to Airbnb is landlords, owners of investment properties. Rather than finding a long-term tenant, landlords are looking at Airbnb as an option to increase their cash flow.  Cash flow is always a drawcard in property investing through there are many costs and risks that you need to think about before turning your rental into an Airbnb.

 

Costs of running an investment property through Airbnb

Service fee between 3-5% of income earned paid to Airbnb

Complex equation of income tax payable on rental income versus number of nights rented

Insurance costs are higher for these types of rentals

Property must be fully furnished including, fridge, washing facilities, beds, seating, T.V. fully equipped kitchen right down to the teaspoons

Rates – see below for new Auckland proposed rates that are up to 121% higher than residential long-term renting rates

Easy access for customers (change of locks or keyless entry)

You pay costs of power, water, gas, internet access or any other mod cons including paid T.V. (Sky, Netflix)

Cleaning costs – they generally are paid by customer, but extra cleaning and unforeseen damage and mess left by customer can push cleaning costs up

Security and safety around property

Constant maintenance of grounds, no long-term tenant to do them

Wear and tear of the property which needs to be upgraded and make sure to keep good reviews coming in so property is rented, especially modern or hip type properties

No guarantee of income or very infrequent income

If you purchase a property for the purpose of Airbnb type dwelling banks operate on a different lending policy and you may not get funding

Time – you deal with each new customer, if you rent out your property to a different tenant every night in peak season you end up dealing with 7 new customers with many questions, complaints or issues

Property damage that is seen and unseen, especially if you want to check the property after every new customer

Theft, you don’t know if they took a spoon, stole a pillow or one of your pictures until you do a full inventory check.  This takes time patience and worry.

 

Auckland Council puts the pressure on Airbnb hosts

The biggest issue for current and future Airbnb hosts is that Auckland Council is proposing properties rented via web-based accommodation services including and not limited to Airbnb, Bookabach, Booking.com where the entire residence is let (not just a room) and depending on the number of days booked.  The council is also not just setting a date going forward for the changes but actually back dating the income received.  Meaning if you stopped using Airbnb now they will still charge you the new rates.

 

Auckland Council says it’s an equity issue in terms of the rating classification of these properties, which potentially are operating as a business.  They should not be classed as residential rates but classed as Accommodation Provider Targeted Rate.

 

The Auckland Council website goes on to list the categories

  • Up to 28 nights – continue to be rated as residential and the APRT does not apply
  • Between 29 and 135 nights
    • Rated as 75% residential and 25% business and
    • If the property is located within the APTR zone then 25% of the APTR will also apply
  • More than 135 nights
    • Rated as business, and
    • If the property is located within the APTR zone then the full APTR will also apply.

 

The table below shows the change in rates in both dollars and percentage terms.

Figure 1 Auckland Council Table

 

Overview

Airbnb is a great service that meets the need of many travellers and holiday makers, but it is starting to make a big impact on cities around the world.  Not just around councils imposing extra rates etc but the supply of housing in the CBD’s.  If some of the biggest cities in the world are having these problems, it will certainly affect Auckland and to make matters worse we already have a shortage of accomodation.

 

We believe Airbnb is for holiday accommodation only and not a type of option that landlords should pursue.  The unforeseen costs and future costs especially once Auckland council puts the new rates in motion other councils around New Zealand will follow suit.  If you purchased a property purely for investment not as a holiday or bach then treat it as an investment not as an experiment.

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